Climate Change, Supply Chain Management and Enterprise Adaptation:
Implications of Global Warming on the Economy Costas P. Pappis University of Piraeus, Greece
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Table of Contents
Foreword ............................................................................................................ viii Preface ................................................................................................................... x Acknowledgment ................................................................................................ xv Chapter 1 The Enterprise in the 21st Century .................................................................... 1 Introduction ............................................................................................................ 1 The Extended Enterprise ........................................................................................ 6 Corporate Social Responsibility ............................................................................ 9 What Does the 21st Century Bring Forward? ..................................................... 17 Discussion and Conclusion .................................................................................. 22 References ............................................................................................................ 25 Chapter 2 Global Warming: Basic Facts ........................................................................... 30 Introduction .......................................................................................................... 30 The Greenhouse Effect ......................................................................................... 32 The IPCC’s Reports.............................................................................................. 34 Changes in Atmospheric Constituents and in Radiative Forcing ................... 36 Surface and Atmospheric Climate Change ..................................................... 39 Changes in Snow, Ice, and Frozen Ground ..................................................... 46 Oceanic Climate Change and Sea Level ......................................................... 49 Climate Change Evolution, Climate Models and the SRES Scenarios ................ 51
Palaeoclimate ...................................................................................................... 58 Discussion and Conclusion .................................................................................. 59 References ............................................................................................................ 62 Chapter 3 Global Impacts of Climate Change .................................................................. 66 Introduction .......................................................................................................... 66 Reviews of Climate Change Impacts.................................................................... 68 Implications for People around the World ...................................................... 70 Implications for Developing Countries........................................................... 74 Implications for Developed Countries ............................................................ 76 Monetary Costs of Climate Change ..................................................................... 78 Discussion and Conclusion .................................................................................. 85 References ............................................................................................................ 89 Chapter 4 Climate Change and Supply Chain Operations .............................................. 93 Introduction .......................................................................................................... 93 Supply Chain Operations and Their Management .............................................. 96 Climate Change and Firms: The Carbon Disclosure Project............................ 104 The Manufacturing Sector ................................................................................. 108 The Transportation Sector ..................................................................................111 Warehousing and Storage ...................................................................................114 Trading ................................................................................................................116 Consumption and Customer Service ...................................................................117 The Role of Information Technology ...................................................................119 Discussion and Conclusion ................................................................................ 121 References .......................................................................................................... 124 Chapter 5 Climate Change Adaptation Policies .............................................................. 127 Introduction ........................................................................................................ 127 Key Climate Adaptation Concepts ..................................................................... 129 Climate Adaptation in the Developed World ..................................................... 132 Climate Adaptation in Developing Countries .................................................... 138 Company Climate Adaptation ........................................................................... 143 Discussion and Conclusion ................................................................................ 147 References .......................................................................................................... 148
Chapter 6 Climate Change Mitigation Policies ............................................................... 152 Introduction ........................................................................................................ 152 Drivers of Global Emissions’ Increase .............................................................. 153 Stabilization of Greenhouse Gas Concentrations .............................................. 156 Instruments of Mitigation................................................................................... 159 The Kyoto Protocol ....................................................................................... 159 Carbon Trading............................................................................................. 163 The Clean Development Mechanism ............................................................ 167 Joint Implementation .................................................................................... 168 Technology Policies ........................................................................................... 169 Shifting to New or Improved Technologies ................................................... 169 Technological Options .................................................................................. 171 Power Generation Technologies ................................................................... 173 Technological Developments in Other Areas ................................................ 175 The Case of Biofuels ..................................................................................... 178 Change of Preferences and Behavior................................................................. 180 Discussion and Conclusion ................................................................................ 182 References .......................................................................................................... 185 Chapter 7 Business Responses to Climate Change ......................................................... 190 Introduction ........................................................................................................ 190 The Carbon Disclosure Project.......................................................................... 192 A Boardroom Agenda .................................................................................... 192 The Carbon Disclosure Project Methodology .............................................. 194 The CDP6 Findings ...................................................................................... 197 The CERES Report............................................................................................. 209 The 100 Companies’ Profiles ....................................................................... 209 The Report Findings ......................................................................................211 EPA Climate Leaders ......................................................................................... 217 Other Greenhouse Gas Programs and Company Examples .............................. 218 Sectors Moving Ahead and New Opportunities ................................................. 220 Examples of Sectors Moving Ahead .............................................................. 220 New Opportunities ........................................................................................ 224 Sectors Lagging Behind ..................................................................................... 225 Company Examples............................................................................................ 227 The Case of Small and Medium Enterprises ...................................................... 231 Discussion and Conclusion ................................................................................ 234 References .......................................................................................................... 238
Chapter 8 Coping with Risk and Uncertainty ................................................................. 241 Introduction ........................................................................................................ 241 Handling Uncertainty and Risk ......................................................................... 248 Decision Framework Approaches to Uncertainty and Risk ............................... 252 The UNEP Framework.................................................................................. 253 The UK Climate Impacts Programme Framework ....................................... 254 The Australian Greenhouse Office Framework ............................................ 256 The Ministry for Environment of New Zealand Framework ......................... 257 Uncertainty, Risk, and Insurance ....................................................................... 258 Discussion and Conclusion ................................................................................ 263 References .......................................................................................................... 266 Chapter 9 Frameworks of Policy Making Under Climate Change ............................... 271 Introduction ........................................................................................................ 271 The UNEP Framework....................................................................................... 273 Scope and Structure ...................................................................................... 273 Generic Issues ............................................................................................... 274 Socio-Economic Scenarios............................................................................ 275 Climate Change Scenarios............................................................................ 277 Integration..................................................................................................... 278 Adaptation to Climate Change: Theory and Assessment .............................. 280 Sectoral Chapters.......................................................................................... 283 The UK Climate Impacts Programme Framework ............................................ 283 Scope and Structure ...................................................................................... 283 The Eight Stages for Decision Making ......................................................... 284 Tools and Techniques .................................................................................... 288 The Australian Greenhouse Office Framework ................................................. 289 Scope and Structure ..................................................................................... 289 Conducting an Initial Assessment ................................................................. 291 The Generic Principles ................................................................................. 294 Other Considerations .................................................................................... 296 The New Zealand Climate Change Office Framework ...................................... 298 Scope and Structure ...................................................................................... 298 How to Assess Climate Change .................................................................... 299 How to Identify What Will be Materially Affected ........................................ 300 Developing Scenarios ................................................................................... 301 Risk Assessment ............................................................................................ 303
Integrating Climate Change Risk Assessment into Council Decisions ......... 304 Discussion and Conclusion ................................................................................ 305 References .......................................................................................................... 306 Epilogue ............................................................................................................ 309 Appendix ........................................................................................................... 317 About the Author ............................................................................................. 332 Index .................................................................................................................. 333
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Foreword
This book on Climate Change, Supply Chain Management and Enterprise Adaptation is very timely. Its topic is of critical importance as it deals with issues that are taking centre stage on the agenda of international politics, business, the media and society at large. Climate Change is without doubt the largest threat to our planet. This book is also important to Supply Chain Management since the latter has great potential to mitigate Climate Change effects. The business world needs to adapt to the challenge of climate change and fulfil its corporate social responsibility role. Increasingly, big companies are announcing climate change mitigation actions in their CSR reports. The author provides a detailed explanation of the climate change phenomenon and its impacts on the economy and environment, based on reliable sources like the IPCC Reports and the Stern Review, which he summarizes well. The book contains appropriate and up-to-date background information and literature review. Many short case studies and references can be found throughout the text. Writing this book was a challenging task. It required coming to terms with heterogeneous issues like Climate Change, Supply Chain Management and Enterprise Adaptation. These issues required adequate handling and their interrelationships had to be analyzed. I believe the final result is great in that the issues and trends are given a proper and balanced treatment. The book can therefore be recommended as a high-quality resource to the interested reader. The target audience includes business people, regulatory authorities as well as academia, i.e., researchers, teachers and students from related disciplines like business and environmental management. However, skipping the more technical parts, the general public may also find this book useful and informative. Luk N. Van Wassenhove INSEAD Social Innovation Centre, France
ix Luc Van Wassenhove (Foreword). Professor Van Wassenhove’s research and teaching are concerned with operational excellence, supply chain management, quality, continual improvement and learning. His recent research focus is on closed-loop supply chains (product take-back and end-of-life issues) and on disaster management (humanitarian logistics). He is senior editor for Manufacturing and Service Operations Management and departmental editor for Production and Operations Management. He publishes regularly in Management Science, Production and Operations Management, and many other academic as well as management journals (like Harvard Business Review and California Management Review). He is the author of several award-winning teaching cases and regularly consults for major international corporations. In 2006, Professor Van Wassenhove was the recipient of the EURO Gold Medal for outstanding academic achievement. Before joining INSEAD he was on the faculty at Erasmus University Rotterdam and Katholieke Universiteit Leuven. At INSEAD he holds the Henry Ford Chair of Manufacturing. He is also the academic director of the INSEAD Social Innovation Centre.
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Preface
This book aims to provide one among many diverse responses to a growing sense of urgency fed by climate change and felt at all levels of social life, including international institutions, governments, local authorities, and enterprises. It is set up as an interdisciplinary treatment of issues raised by climate change in connection with its implications for the society, environment and economy, particularly at the company and the supply chain levels, and as an aid to decision makers, being they government officials or business analysts, in their endeavor to meet the economic, social and environmental challenges posed by global warming. It is a synthesis of facts, arguments and research results found in the literature aiming to contribute to the work made in various related fields and disciplines, and shape a better understanding regarding the serious impacts of climate change on enterprises, supply chains and global economics, the implications for management, and the decision making tools and scientific background available for formulating adaptation and/or mitigation policies. Its target audience includes business people, management staff, regulatory authority staff, teachers, researchers and students in Business Management Departments and, finally, any reader interested in the major challenges that society and economy, and actually the whole planet, is faced with. Mounting scientific evidence shows that Earth’s climate is dramatically changing due to the greenhouse emissions caused by human activities, notably by burning fossil fuels for energy production and transport and other uses. The economic growth that followed the Industrial Revolution and the progress of Supply Chain Management that resulted as a necessity from trade explosion and globalization led to global warming. Climate change, a result of global warming, is bringing severe phenomena along with it, causing, among others, extreme weather events, disruption of supply chain operations, dislocation of industrial, agricultural, recreational and commercial activities, increase of living costs and loss of consumer power, desertification of lands, dramatic decrease in biodiversity, sea level rise, and damage to natural habitats
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and ecosystems. Some of these impacts can be observed already, while others will be visible soon. In general, the major impacts of climate change are long-term and, to mitigate its effects, governments have to take (and are actually taking) action right now. However, the long-term nature of the problem must not draw attention away from the fact that different sectors are facing its effects even now. While our world is increasingly becoming uncertain and risky, climate change is proven to be one of the major contributors to current instability. Decision making under climate change has to consider some new risks, albeit accompanied with some conditional opportunities. Supply chains and enterprises, in particular, are increasingly proven to be extensively vulnerable to climate change, posing to management new questions demanding urgent answers. Indeed, climate change has very significant consequences regarding the performance of supply chains and enterprises, many of which are faced with the danger of serious damage, even collapse, for several reasons, including big changes in the structure of markets, the uncertainty of availability of raw materials and components, higher transportation risks and costs, flooding, higher insurance and energy costs, etc. How to accommodate risks, set strategies for future development, and properly address climate change at the company level? In fact, not all companies are faced with the present and prospective risks, depending on what are the types of their assets and where they are located, what they produce, what types and amounts of energy they use, etc. Furthermore, there are leaders in the business world that have developed corporate practices which take climate change risks and opportunities into account and take respective action; they recognize the threats posed and opportunities opened by global warming at board of directors level, they consider them as a near-term priority, they develop relevant strategies, they participate in collective initiatives, and they adopt formal reporting systems that show their preparedness to undertake action, including efficient production processes and supply chain operations and effective use of energy. Climate Leaders, an industry-government partnership in the USA created by the Environmental Protection Agency that works with companies to develop comprehensive climate change strategies, is a characteristic example. In Climate Leaders’ site (http://www.epa.gov/stateply/casestudies/index. html), where several case studies from different industries are reported, it is well supported that environmental friendly company, and more generally, supply chain management may be practical and effective (consider, for example, the relation between improved energy efficiency and reduction of greenhouse gas emissions). Thus, there are several success examples, but what is important is that there are tools and techniques available from operations research and management science, which may be helpful for the above tasks. One of the main tasks of the book will be to outline relevant frameworks of decision analysis.
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The subject to be treated in this book is the implications of global warming for world economy, focusing on supply chain management and enterprise adaptation. The tools and frameworks available for setting strategies and making decisions under uncertainty, as well as the risks implied by climate change, are in the core of the presentation. Starting with a reference to the present situation and trends regarding the enterprise in the beginning of the 21st century, particularly in an “extended enterprise” framework, the social responsibility of enterprises, particularly its contribution to sustainability, are discussed. The basic facts about climate change are outlined, its impacts on the economy and society are presented, and issues of climate change adaptation and mitigation are discussed. Reference is made to stories from the world of enterprises referring to adaptation strategies and practices undertaken to cope with climate change. Frameworks for decision making regarding issues of business design and operation under risk and uncertainty implied by climate change are also presented. The amount of literature covering the different disciplines, from which this book has borrowed wisdom and knowledge, is immense. Therefore, only a very limited subset of sources used have been cited, in particular those that have been considered as most helpful to the author’s task to narrate the thrilling story of the book’s subject. The book is structured as follows: Chapter 1 explores some of the features of today’s enterprise considered to be most important, particularly in view of the main topics of this book. Extended enterprise and corporate social responsibility, two of the most fundamental topics for the business world that emerged during the late 20th century and are shaping a modern enterprise, are discussed. Also, new risks and challenges that arise from the environment of the 21st century enterprise, several of which are directly or indirectly related with climate change, are presented. Chapter 2 introduces the basic facts regarding global warming, based almost exclusively on the latest scientific findings as reported in February 2007 by the Intergovernmental Panel on Climate Change’s Fourth Assessment Report, particularly the Report of the Working Group I on the Physical Science Basis of Climate Change. The facts concern observed changes in atmospheric constituents and in radiative forcing, surface and atmospheric climate changes as well as changes in snow, ice, frozen ground and oceans. In Chapter 3 the issue of the global impacts of climate change is treated. The discussion is based on findings of the Stern Review on the Economics of Climate Change, considered to be the largest, most widely known and discussed and most influential of the reports assessing the impacts of climate change on economy and society so far. A broader reference to the discussions raised by the Review’s proponents and opponents is also made.
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In Chapter 4 the subject of the cause-effect relationships between climate change and supply chain operations is treated. The contribution of specific operations along the supply chain (related to production, transportation, warehousing and storage, trading, consumption and customer service) to global warming is discussed. Correspondingly, it is shown how the environment impacts on such operations. The effect of Technology, particularly Information Technology, on the relation between climate change and supply chain operations is also explored. Key climate adaptation concepts are introduced and the issues of climate adaptation in the developed world as well as in developing countries are discussed in Chapter 5. The subject of the particular position of the company in reference to climate change is subsequently treated and the range of incentives or barriers that could encourage or prevent climate adaptation is explored. The economic framework for climate adaptation is also elaborated. Chapter 6 introduces the issue of climate change mitigation policies. Drivers of global greenhouse gases emissions’ increase are presented and the problem of stabilization of greenhouse gas concentrations is discussed. Instruments of mitigation, including the Kyoto Protocol, carbon trading, the Clean Development Mechanism and Joint Implementation, as well as related technology policies, are presented. Shifting to new or improved technologies, technological options, power generation technologies, technological developments in other areas and the case of biofuels are discussed. The chapter also makes reference to the issue of change of preferences and behaviour. Chapter 7 focuses on business responses to climate change. Some well-known paradigms and collective initiatives will serve as reference of where the business world is moving on. Specific reference to the Carbon Disclosure Project, the CERES Report and other important greenhouse gases programs and initiatives is made. Several company examples are presented, together with examples of sectors moving ahead and domains of new opportunities among sectors emerging from climate change. In Chapter 8, approaches to coping with risk and uncertainty in policy making, particularly in a climate change context, are presented. The presentation includes four decision analysis frameworks, namely, the UNEP, the UK Climate Impacts Programme, the Australian Greenhouse Office and the Ministry for the Environment of New Zealand frameworks. Uncertainty and risk are particularly related with the insurance industry, a sector increasingly affected by the impacts of climate change in terms of accelerating trend of liabilities, costs and losses. As relevant developments in all other sectors of the economy are reflected on this sector, it was thought meaningful to make specific reference to the insurance industry.
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Finally, Chapter 9 presents an overview of the above four decision analysis frameworks, which were selected with the major criterion being to serve the main purposes of this book, and more specifically, to be of the widest applicability, with proper adjustment, not only by government officials but also by decision analysts at company level. Issues such as frameworks’ scope and structure, generic issues, stages for decision-making, tools and techniques are also discussed. Summarizing the above, it is evident that climate change has become the topmost environmental issue, with extremely serious economic and social implications, that societies, governments and businesses are faced with. As the emissions continue to grow despite efforts made and commitments undertaken, their impacts on climate change felt so far, and, even more, the ones anticipated, leave no space for doubt that strong concerted action is urgently needed at all levels, from corporation to city, as well as national and international institutions, to address the challenges and reverse current trends. Companies, in particular, should know how to identify and assess the risks arising from climate change and develop action plans for adaptation covering all aspects of the challenges their supply chains will encounter. Nevertheless, the author shares the conviction of many others that, in view of the unprecedented challenges posed to mankind by current global warming, complicated as they are by other socio-economic problems of the planet, a new world paradigm is urgently needed for a sustainable planet, based on different patterns of social organization, production and consumption, where a different value system is endorsed, which pays due attention to environment and life on Earth. The solution approaches presented in this book promise to accommodate somehow, in the near or distant future, some of the current problems, and avoid a total collapse. However, under the currently prevailing values and models of life, and despite whatever sacrifices may be accepted by human society while these values continue to prevail, it is difficult, if not impossible, to see how Earth may sustain life, full of the treasures of biodiversity and of opportunities for every human being to live in harmony with nature and society. Therefore, to the author’s view, a radical departure from the current predominating values and models of life, towards sustainability, seems to be imperative.
xv
Acknowledgment
Over the years, a very large number of individual scientists, research groups, public national and international organizations and institutions, as well as companies and company associations, have contributed to the building of knowledge and understanding of the facts, ideas and laws governing the issues discussed in this book. From the plethora of scientists and other contributors to this treasure of knowledge and wisdom, for whom a list of acknowledgements would be infeasible to draw up, I gained invaluable insights and understanding and a motivation to write this book on the implications of global warming for the enterprise, supply chains and economy. To all of them I confer my gratitude for their assistance in writing the book. My special acknowledgement goes to the members of the International Panel on Climate Change and all the distinguished scientists who have contributed to its reports. These reports have been among the major sources used in order to document the basic facts about climate change, which is the subject of Chapter II. This holds also for the contributors to the famous Stern Review on the Economics of Climate Change, and its inspirator, Sir Nicolas Stern, whose report has been extensively used in this book in order to document particular impacts of climate change on the economy and society, which are treated in several parts of the book. These extremely valuable documents, fundamental for the knowledge we have about climate change and its impacts on society and economy, have been given worldwide publicity and are freely accessed on the Internet. In this book, they have been the source of many, sometimes lengthy, quotations used to substantiate diverse facts and arguments elaborated in most chapters. A special note of appreciation and thanks goes also to a number of friends, and ex- or present Ph.D. students of mine, distinguished scientists and close collaborators, who were willing to go through and comment on parts of the book. I would like specifically to mention Prof. Nikos I. Karacapilidis for his invaluable advice. Mr. Thomas Dasaklis, M.Sc., Ph.D. student, has provided me with his valuable support
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for preparing the illustrations and made helpful comments on parts of the manuscript. Dr. Nikos P. Rachaniotis, Dr. Giannis T. Tsoulfas, Dr. Theodor G. Voutsinas, and Mr. Evangelos C. Petrou, M.Sc., Ph.D. student, have reviewed parts of the manuscript and provided me with helpful suggestions. My thanks go to all of them and also to all other friends of mine who have encouraged me in this endeavor. The assistance of the reviewers, who provided me with valuable feedback and suggestions is also acknowledged. Finally, I would like to express my appreciation to the publisher, IGI Global, for its confidence in the project and my work, and for bringing this body of knowledge to a worldwide audience. My special thanks go to Mrs. Julia Mosemann for her valuable assistance throughout the development process of the book, and Mr. Jan Travers, Vice President of Editorial, for the cooperation we had during the set-up of the project. Costas P. Pappis University of Piraeus, Greece
The Enterprise in the 21st Century 1
Chapter 1
The Enterprise in the 21st Century
INTRODUCTION Climate change has emerged lately as one of the main issues of concern, may be the most important, in economy and society. This was not so, even just a few years ago. Climate change used to be considered, even until quite recently, as something not much more than mere scientific hypothesis. But the situation has radically changed. The planet is now almost universally recognized as being in a state of emergency because of global warming and its impacts on the environment, economy and human societies. Enterprises are increasingly faced with the climate change challenge and with having to take measures to adapt. Countries and the whole international community are taking urgent measures to mitigate the causes of climate change and hopefully, in a rather distant future, reverse the catastrophic trend. DOI: 10.4018/978-1-61692-800-1.ch001 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
2 The Enterprise in the 21st Century
Climate change is of anthropogenic origin. It is caused by global warming, which is in turn the result of particular human activities, namely, burning fossil fuels and change of land use, which followed the Industrial Revolution of the mid18th century. These activities are producing excessive amounts of CO2 and other gases, the so-called greenhouse gases (GHGs), which absorb part of the thermal radiation emitted by the land and ocean and reradiate it back to Earth (the so-called Greenhouse Effect). The result is global warming which has tremendous impacts on Earth’s climate. While global warming basic facts will be summarized in the next chapter, a brief account of the current international situation regarding GHG emissions in different countries, particularly the most pollutant ones, may help put the discussion of this chapter into perspective. Emissions are produced in every inhabited part on Earth, but some countries, notably the industrialized ones as well some of the emerging economies, above all China, have a disproportionate share in the total production of GHGs. More specifically, the total and the per capita emissions of the top ten global CO2 emitters for the year 2006 appear in Figure 1 (EIA, 2008a). It can be seen that China and the U.S., with a yearly 6,018 and 5,903 million metric tons of CO2, respectively, are by far the main contributors of GHGs in terms of total emissions. China, with one-fifth of annual global CO2 emissions, has become the world’s leading source of GHGs, especially CO2, the primary heat-trapping gas, and its emissions are growing rapidly. However, in terms of per capita emissions, while Chinese citizens produce on average 4.6 metric tons of CO2 yearly, approximately equal with the world average, U.S. citizens contribute annually with an amount of 19.8 metric tons of CO2. In the case of China, its single largest source of GHG emissions is the burning of fossil fuels (coal, oil and natural gas) for electricity, heat and transport (EIA, 2008b). Coal is by far China’s most important fossil fuel, and some 80% of its total CO2 emissions from energy sources are related to the use of coal. The other major sources of China’s GHG emissions are agriculture (roughly 15%), industrial processes (9%), and waste (2%). An international comparison of GHG emissions by sector in 2005 appears in Figure 2 (Seligsohn et al., 2009a), where it is shown that nearly three quarters of China’s GHG emissions result from the combustion of fossil fuels for energy. Apparently, a different Chinese energy policy would have a profound impact on China’s contribution to global warming. China’s energy mix is unusually tilted toward industrial uses, and thus improvements in the industrial sector have large overall impacts (Seligsohn et al., 2009b). Figure 3, shows energy consumption by sector in 2007 in China, India, Japan, Russia, EU-27, and the United States. In the case of the second major GHG polluter, the U.S., the country’s energy intensity by industry is depicted in Figure 4 (Seligsohn et al., 2009c). It is shown Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
The Enterprise in the 21st Century 3
there that energy expenditures per gross value added are highest in the case of the primary aluminum production followed by lime manufacturing, cement manufacturing, pulp mills, iron and steel mills and ferroalloy manufacturing. As pointed out by the World Resources Institute (http://earthtrendsdelivered.org/us_energy_intensity_by_industry), American manufacturers fear that the imbalances created by aggressive climate policy in the United States could contribute significantly to the pushing of jobs out of the country and relocation of industry to countries with lower standards and production costs. For most U.S. industries, these fears are overstated and limited to industries where energy and fossil fuels are a large portion of their cost structures and where those industries participate in global markets. At the enterprise level, the new reality imposed by global warming is shaping new trends and priorities. It is interesting to note, however, that, apart from this new reality, during the same period, the business world has been met with some other major challenges, notably globalization and, very recently, financial crisis. Thus, while modern enterprises have to cope with a new global threat (and some opportunities as well), namely climate change, at the same time major developments made it necessary for them, among other changes, to re-shape their activities and organization and go global. The enterprise of the 21st century is not the same as it has been until even two decades ago. Enterprises are strategically motivated and organized taking into account challenges, in the form of opportunities and threats, produced internally or externally by factors that an enterprise does not normally control. To answer the question how today’s enterprise should re-shape its strategies in view of the opportunities and threats created by its environment is equivalent to answering the question which Figure 1. Per Capita Emissions of Top Ten Global CO2 Emitters in 2006. (Source: EIA, 2008)
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4 The Enterprise in the 21st Century
is their new environment and their new opportunities and threats. These are traditionally considered to stem from changes in the political, economic, social and technological environment, the four components of the well known PEST analysis (from the initials of the macro-environmental factors used in the environmental scanning component of strategic management). Natural environment is considered to be inherent in the quadruple. If not, then natural environment should be added as a fifth component, at least as important as the other four (note that some analysts added Legal and rearranged the mnemonic to SLEPT, while inserting Environmental factors expanded it to PESTEL or PESTLE, which is popular in the UK. The model has recently been further extended to STEEPLE and STEEPLED, adding education and demographic factors (http://en.wikipedia.org/wiki/PEST_analysis). This chapter focuses on exploring some of the important features of today’s enterprise environment, particularly those which are connected with the main topics of this book: climate change and its impacts on economy, supply chains and enterprises. More specifically, two of the most fundamental topics that emerged during the late 20th century will be discussed: Extended Enterprise and Corporate Social Responsibility (CSR). These two issues lie in the core of any approach that has to do with shaping a modern enterprise. While they are described rather vaguely and, sometimes, raise controversy as to what their essential nature and motives are (particularly for the latter), extended enterprise and CSR represent two of the Figure 2. International comparison of GHG emissions by sector in 2005. (Source: Seligsohn et al., 2009a)
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The Enterprise in the 21st Century 5
most important distinctive features of businesses inherited by the previous century. Of course, this century, particularly its second half, witnessed some other major developments that also marked business’s environment, notably the information revolution, the advances in communication technology, the proliferation of multinational enterprises, globalization and trade explosion, and the wide adoption of the supply chain model in business. While the discussion of these changes goes beyond the scope of this book, extended enterprise and CSR are worthy discussing for one exceptional reason, namely, that they may be the features that, more than all others, are closely connected with the book’s central issue, climate change and its effects on the world economy, enterprises and supply chains. Notably, extended enterprise goes along particularly with globalization and trade explosion, whose extensive impact on climate change will become obvious in the sequel. CSR, on the other hand, is closely connected, among other issues, with the core subject of the sustainability movement, which is (and will be for many years to come) climate change.
Figure 3. Energy consumption by sector in 2007 in China, India, Japan, Russia, EU-27, and the United States. (Source: Seligsohn et al., 2009b)
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6 The Enterprise in the 21st Century
This chapter will be concluded with a presentation of evidence regarding new risks and challenges that arise from the environment of the 21st century enterprise. Some of these are directly or indirectly related with climate change. These, together with the features mentioned above, may be regarded as forming the enterprise’s background for the new century.
THE EXTENDED ENTERPRISE During most part of the 20th century, up to the 80’s, enterprises, particularly the large ones, used to be organized based on self-reliance. Services such as procurement, transportation, warehousing, distribution etc were self-provided, along with the main productive activities of the enterprise. According to this model, the company consisted of an “internal” environment made up of its own resources and operations, as opposed to its “external” environment, made up of third parties (e.g. financial institutions, business partners, suppliers, customers), with whom the company operated transactions The external environment included also some other important parties, e.g. governments, NGOs etc. The boundaries between the “internal” and the “external” environment were clear cut. The industrial developments during the 1980’s and 1990’s have changed the market conditions for industrial activities. The firms are blurring their traditional boundaries and entering into close collaboration with other firms and parties (Szegheo & Andersen, 2001). Due to developments, such as company specialization on particular
Figure 4. U.S. Energy intensity by industry. (Source: Seligsohn et al., 2009c)
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The Enterprise in the 21st Century 7
products or services, process standardization, quality management, the advances in information and communication technology and globalization of trade, the model prevailing so far is being increasingly abandoned. Today’s enterprises increasingly adopt the so-called “extended enterprise” model of the late 20th century based on the interconnection of enterprises. A formal definition of extended enterprise given by the Business Dictionary (http://www.businessdictionary.com) describes it as a “wider organization representing all associated entities (customers, employees, suppliers, distributors, etc) who directly or indirectly, formally or informally, collaborate in the design, development, production, and delivery of a product to the end user”. Some, but not all, of these entities are links in a supply chain starting with suppliers and going through production units and distributors up to the final consumers. From an extended enterprise’s perspective, supply chains should be viewed in their “closed loop” form, that is, activities concerning return and reuse of used products and materials should be considered as links in the supply chain consisting of a forward (from supplies through production to the end user) and a reverse (from the end user back to producers or suppliers) branch. According to the extended enterprise model, the enterprise is generally organized as part of a network of interconnected entities (normally other companies and organizations, including end customers). In this network, each entity, whether it operates independently or cooperatively, coordinates its activities with the rest of the network based on full information. It views itself as an organizational entity that extends beyond its location and the boundaries set by its articles of association, being part of a broader organization, which consists of producers that are suppliers to other producers providing products or services. Such products and services may extend from equipment, raw materials, parts, components and other supplies, to recruitment of personnel, advertising, packaging, transporting, warehousing, distributing, wholesaling, retailing, public relations etc. The community of participants involved in the network is thus able to provide final products or services that satisfy end customers in terms of quantity, quality and on-time delivery. This is made possible by developing operations that span company boundaries and a communication network that allows, among others, knowledge of products or services of suppliers as soon as they are available, suppliers’ stocks in real-time, exact customer order status etc. The members of the extended enterprise may be inter-connected according to different types and degrees of connection. For example, a connection may be established by contract, as in the case of partnerships or trade agreements, e.g. outsourcing. Other connections may be looser, as in the case of open market exchange. In this environment, outsourcing is common practice, having replaced the previous practice of procuring in-house most or all of the services and functions required
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8 The Enterprise in the 21st Century
for the marketing of the company’s products or services. Outsourcing of particular services and functions allows the enterprise to concentrate its resources and limit its activities where it is most competent. A quite functional approach to the extended enterprise model is the one considering the extension of the enterprise in terms of stakeholders, i.e. people (individuals, teams, associations) who have key-roles in, or concerns about, the enterprise. The stakeholders of the extended enterprise may include groups of people such as the ones included in Table 1 (Schekkerman, 2004): Modelling the extended enterprise is an important issue. In (Szegheo & Andersen, 2001), different enterprise modelling approaches, such as process modelling (ARIS), active knowledge modelling, object-oriented and agent based modelling, are compared in order to explore whether these approaches are capable of modelling the extended enterprise, i.e. whether they have the capabilities to model a network of enterprises and not only one individual enterprise. The conclusion is that, since each modelling technique was developed to satisfy some particular needs, the model builder and the user of the model can benefit most from the chosen model if the right tool has been chosen for their purpose. Each tool has its application area where it can be used to its best advantage. Thus, before choosing the modelling approach, the model builder or the modelling team has to define precisely the purpose of the model. The extended enterprise architecture, i.e. the model according to which all of the different elements go to make up the extended enterprise and are inter-related, may refer to issues such as business and technology strategy alignment, parties’ involvement, executive management involvement, etc (Schekkerman, 2006). An extended enterprise may be developed at different “levels of maturity”, from the level of no extended enterprise architecture up to the optimization level (extended enterprise fully developed). Thus, for example, in the case of the highest maturity model, as far as business and technology strategy alignment is concerned, business/ technology cost/benefits validation metrics for end-to-end value chain examination
Table 1. Stakeholders of the extended enterprise. (Source: Schekkerman, 2004) Management
Shareholders
Government
Senior executives
Alliance partners
Trades Associations
Co-workers
Suppliers
The press
Employee groups
Lenders
Interest groups
Customers
Analysts
The public
Prospective customers
Future recruits
The community
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The Enterprise in the 21st Century 9
are developed. Regarding parties’ involvement, for the same maturity model, a measurement structure is in place to manage the extended enterprise environment, etc. Finally, it should be noticed that environmental aspects, including climate change, and relevant attitudes and practices adopted by the community of participants (or stakeholders) in the extended enterprise, are important issues. Generally, participants are self-motivated to pay proper attention to those aspects. On the other hand, government regulation sets standards and puts specific limits to their activities that they have to respect. Abiding to relevant rules and practices may not be disregarded by prospective participants in the community of an extended enterprise.
CORPORATE SOCIAL RESPONSIBILITY The term “Corporate Social Responsibility” came into common use in the early 1970s. Various definitions have been proposed for this term. Most approaches converge to some fundamental concepts, although some differences between the Continental Europe and the Anglo-Saxons, and even within Europe, have been identified. In the European Commission’s Green Paper under the title “Promoting a European framework for Corporate Social Responsibility” CSR has been defined as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (European Commission, 2001, p. 6). The CSR Network (http://www.csrnetwork.com/csr.asp) gives the following definition of CSR: “CSR is about how businesses align their values and behavior with the expectations and needs of stakeholders - not just customers and investors, but also employees, suppliers, communities, regulators, special interest groups and society as a whole. CSR describes a company’s commitment to be accountable to its stakeholders”. In this definition, stakeholders are explicitly referred to. According to the above Network, CSR demands that businesses manage the economic, social and environmental impacts of their operations to maximize the benefits and minimize the downsides. Among the key issues included are governance, environmental management, stakeholder engagement, labor standards, employee and community relations, social equity, responsible sourcing and human rights. Notably, the Network views CSR as a company’s means not only to fulfill a duty to society, but also to bring competitive advantage: companies using an effective CSR program can: • • •
improve access to capital sharpen decision-making and reduce risk enhance brand image
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10 The Enterprise in the 21st Century
• • •
uncover previously hidden commercial opportunities, including new markets reduce costs attract, retain and motivate employees.
Ideally, a CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure their adherence to law, ethical standards and international norms. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honoring of a triple bottom line: People, Planet, Profit (a phrase capturing an expanded spectrum of values for measuring organizational success, including economic, ecological and social criteria, which was coined by John Elkington in 1994 that was later expanded and articulated in his book “Cannibals with Forks: the Triple Bottom Line of 21st Century Business”). Τhis line is equivalent to the sustainability triple bottom line: Society- EnvironmentEconomy (Figure 5). Sustainable practices (at the intersections) allow for satisfactory outcomes for humans and the environment, while fulfilling the social and economic needs of current and future generations (Curran, 2009, p. 4). CSR is rooted, among others, in the business ethics movement that developed during the 1980s and 1990s, both within major corporations and within academia. One of the early collective movements towards establishing CSR practices was the foundation in 1995 by senior European business leaders of CSR Europe, a leading European business network for CSR, working across Europe and globally, with around 70 multinational corporations and 25 national partner organizations as members. The organization was founded in response to an appeal by the (then) European Commission President Jacques Delors and is a platform for “connecting companies to share best practice on CSR, innovating new projects between business and stakeholders and shaping the modern day business and political agenda on sustainability and competitiveness”. In the organization’s invitation to enterprises across Europe to join the initiative (CSR Europe, 2009, p. 2), the goals set are the following: 1. 2. 3. 4. 5.
Innovation and entrepreneurship Skills and competence building Equal opportunities and diversity Health and safety Environmental protection. To achieve these goals the following strategies are adopted:
1. 2.
Corporate responsibility in the mainstream of business Stakeholder engagement
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The Enterprise in the 21st Century 11
3. 4. 5.
Leadership and governance Communication and transparency Business-to-business co-operation and alliances.
A similar appeal, made by the European Council in March 2000 in Lisbon, appeared in a communication addressed to companies’ sense of social responsibility regarding best practices for lifelong learning, work organization, equal opportunities, social inclusion and sustainable development. In the next year, the Green Paper of the European Commission under the title “Promoting a European framework for Corporate Social Responsibility” mentioned above was published, focusing mainly on companies’ responsibilities in the social field. The aims of this document were, firstly, to launch a debate about the concept of CSR and, secondly, to identify how to build a partnership for the development of a European framework for its promotion. In the Green Paper it was noted that “by stating their social responsibility and voluntarily taking on commitments which go beyond common regulatory and conventional requirements, which they would have to respect in any case, companies endeavour to raise the standards of social development, environmental protection and respect of fundamental rights and embrace an open governance, reconciling interests of various stakeholders in an overall approach of quality and sustainability” (European Commission, 2001, p. 3). The term “stakeholders” used in the above note, meaning those impacted by an organization’s activities beyond shareholders, is essential for the CSR movement. It is interesting to note that this term appears also in relation to the extended enterprise concept (see above). Figure 5. The sustainability triple bottom line. (Source: Curran, 2009)
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12 The Enterprise in the 21st Century
A follow-up to the Green Paper was presented in the next year by the European Commission. In a communication referring to CSR as “a business contribution to Sustainable Development” (European Commission, 2002), an EU strategy to promote CSR is formulated by the Commission. The communication noted that companies are increasingly aware that responsible behavior leads to sustainable business success and that CSR is also about managing change at company level in a socially responsible manner. It made again use of the term “stakeholders”, whose requirements and needs should be set by the company into a balance, which is acceptable to all parties. If companies succeed in managing change in a socially responsible manner, this will have a positive impact at the macro-economic level. CSR can therefore make a contribution to achieving the strategic goal adopted by the Lisbon Summit of March 2000, according to which, the European Union should become by 2010 “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” (European Commission, 2002, p. 3). CSR can also make a contribution to the European Strategy for Sustainable Development. In the above communication, a large consensus on CSR’s main features was acknowledged, despite the wide spectrum of approaches. The main features include the following (European Commission, 2002, p. 5): • •
•
CSR is behavior by businesses over and above legal requirements, voluntarily adopted because businesses deem it to be in their long-term interest; CSR is intrinsically linked to the concept of sustainable development: businesses need to integrate the economic, social and environmental impact in their operations; CSR is not an optional “add-on” to business core activities - but about the way in which businesses are managed.
The critical importance of CSR for the EU is re-confirmed in a more recent communication of the European Commission to the European Parliament, the Council and the European Economic and Social Committee under the title “Implementing the partnership for growth and jobs: making Europe a pole of excellence on Corporate Social Responsibility” (European Commission, 2006). In this communication the Commission expresses its wish to give greater political visibility to CSR, to acknowledge what European enterprises already do in this field and to encourage them to do more. The Commission notes that “CSR has become an increasingly important concept both globally and within the EU, and is part of the debate about globalization, competitiveness and sustainability. In Europe, the promotion of CSR reflects the need to defend common values and increase the sense of solidarity and cohesion” (European Commission, 2006, p. 2). Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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With the communication the Commission announced its backing to the launching of the European Alliance for CSR, described in the document attached to the communication. The Alliance is a political umbrella for new or existing CSR initiatives by large companies, SMEs and their stakeholders. The Alliance has an open nature and European enterprises of all sizes are invited to voluntarily express their support. In the document attached to the communication, the political significance of CSR for the EU is underlined: “CSR matters because it mirrors the core values of the society in which we wish to live” (European Commission, 2006, p. 10). While Continental Europe has been on the forefront of the CSR movement from the very beginning, similar initiatives have been developed elsewhere in the world. For example, the Government of Canada has issued a valuable tool that may guide businesses to assess the effects of business activities on others, develop and implement a CSR strategy and commitments, and measure, evaluate and report on performance and engage with stakeholders (Government of Canada, 2009). The Guide sets out a six-stage “plan, do, check and improve” implementation framework for a CSR approach and is revised periodically. Several websites on CSR and sustainable Development are mentioned as well as CSR organizations, both Canadian and international. Among the key international CSR instruments is United Nations Global Compact or Principles for Responsible Investment (UN PRI), which is also referenced in the Government of Canada’s Guide. Launched in July 2000, the UN Global Compact is both a policy platform and a practical framework for companies that are committed to sustainability and responsible business practices. It seeks to align business operations and strategies everywhere with the following ten universally accepted principles in the areas of human rights, labor, environment and anti-corruption (UN Global Compact, 2008, p. 6): •
•
Human rights ◦ Principle 1. Businesses should support and respect the protection of internationally proclaimed human rights; and ◦ Principle 2. Make sure that they are not complicit in human rights abuses. Labor ◦ Principle 3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; ◦ Principle 4. The elimination of all forms of forced and compulsory labor; ◦ Principle 5. The effective abolition of child labor; and ◦ Principle 6. The elimination of discrimination in respect of employment and occupation.
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14 The Enterprise in the 21st Century
•
•
Environment ◦ Principle 7. Businesses are asked to support a precautionary approach to ◦ environmental challenges; ◦ Principle 8. Undertake initiatives to promote greater environmental responsibility; and ◦ Principle 9. Encourage the development and diffusion of environmentally friend technologies. Anti-corruption ◦ Principle 10. Businesses should work against corruption in all its forms, including bextortion and bribery.
Through a wide spectrum of specialized work streams, management tools, resources, and topical programs, the UN Global Compact aims to advance two complementary objectives: a) mainstream the ten principles in business activities around the world and b) catalyze actions in support of broader UN goals, including the Millennium Development Goals. Other CSR instruments also referenced in the Government of Canada’s guide include the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises, the International Labour Organization Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (www.ilo.org/multi), the Millennium Development Goals mentioned above (www. developmentgoals.org), etc. The fact that international organizations such as those mentioned above have been engaged in shaping CSR related guidelines and policies shows that CSR has gained global recognition as an emerging approach for Strategic Management. Finally, several non-governmental CSR-related codes and standards, which are also cited in the Government of Canada’s guide, include the AccountAbility AA1000 Series (http://www.accountability21.net), the Social Accountability International standard (SA8000) (http://www.sa8000.org), the Australian standard on compliance programs, the Global Reporting Initiative, the ISO 14001 and ISO 9001 series, etc. Social accounting, auditing and reporting is an important issue for CSR. Among the guidelines developed for this purpose, Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines have gained wide acceptance. GRI fulfills the requirements for a globally shared framework of concepts, consistent language, and metrics, by providing a trusted and credible framework for sustainability reporting that can be used by organizations of any size, sector, or location. The GRI Framework is intended to provide a generally accepted framework for reporting on an organization’s economic, environmental, and social performance. The Framework consists of the Sustainability Reporting Guidelines, the Indicator Protocols, Technical Protocols, and the Sector Supplements. A “Third Generation” (the so-called 3G) of the Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
The Enterprise in the 21st Century 15
GRI’s Sustainability Reporting Guidelines, launched in October 2006, is available (as the GRI seeks to continually improve the Guidelines, these are evolving built on previous releases). As expected, GRI provides guidelines and metrics also for sustainability and its environmental dimension. This dimension concerns an organization’s impacts on living and non-living natural systems, including ecosystems, land, air, and water. Environmental Indicators cover performance related to inputs (e.g. material, energy, water) and outputs (e.g. emissions, effluents, waste). In addition, they cover performance related to biodiversity, environmental compliance and other relevant information such as environmental expenditure and the impacts of products and services (Global Reporting Initiative, 2006). Apart from GRI, businesses may find guidance elsewhere, including the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (UN ISAR, 2009) that provides voluntary technical guidance on eco-efficiency indicators, corporate responsibility reporting and corporate governance disclosure. The ISO 14001 environmental management standard, as well as the corresponding European standard EMAS, should also be mentioned for their extensive use in corporate management as far as the environment is concerned. Further to the above, the International Organization for Standardization (ISO) has launched the development of an International Management Standard on CSR. The guidance standard (ISO 26000) is expected to be published in 2010 and will not be a certification standard (http://www.iso.org/sr). The practice of CSR has raised much debate. Proponents underline the various benefits, which are not restricted on ethical grounds alone, that corporations, along with human society and the planet, get by operating with a perspective broader than their short term profit. Note, however, that in general these benefits are difficult to quantify. On the other hand, critics question the motives behind CSR, accusing businesses for corporate hypocrisy and insincerity. They argue, among other things, that CSR is nothing more than a mere marketing “gadget”; that some businesses adopt CSR practices for the commercial benefit they enjoy by raising their reputation with the public or with government; and that CSR is often used in order to distract the public from ethical questions posed by their core operations. They also invoke the nature of business arguing that CSR distracts corporations from their role in the society, which is economic, namely, to create profits. As put by the Nobel prize winner Milton Friedman, who argues that the social responsibility of business is to increase profits, “when I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
16 The Enterprise in the 21st Century
its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are or would be if they or anyone else took them seriously preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades” (Friedman, 1970). Despite arguments and critiques such as the above, however, CSR in practice is increasingly accepted by modern enterprises arguing that they prefer to act as “citizens of the world” that have to share the planet’s problems and contribute actively to their solution along with ordinary individual citizens than ignore these problems, which are also their problems. Thus today most major corporate websites emphasize companies’ commitment to promoting social values and publish regularly reports on related activities. Such activities include launching community-based development projects, developing robust mechanisms to safeguard human health and safety and avoid human or environmental accidents, building a reputation for integrity and best practice, supporting financially local organizations or communities in developing countries, giving charities and donations to national foundations, sponsoring cultural activities, offering grants to students, establishing educational facilities, etc. By doing so, corporations respond to various motivations, including self-motivation and conforming to employees and other stakeholders’ priorities and expectations, public pressure and regulation. Government regulation is important in providing motivation to companies regarding CSR. An example is Denmark. On December 16, 2008, the Danish parliament adopted a bill making it mandatory for the largest Danish companies, investors and state owned companies to include information on CSR in their annual financial reports (http://www.csrgov.dk/sw51190.asp). The aim is to inspire businesses to take an active position on social responsibility and communicate this. The statutory requirement is part of the Government’s action plan for CSR and is intended to help improve the international competitiveness of Danish trade and industry. Danish businesses are free to choose whether or not they wish to work on CSR. However, there is a statutory requirement from 2009 that large businesses in Denmark must take a position on CSR in their annual reports. Businesses covered by the statutory requirement must report on: 1. 2.
The business’s social responsibility policies, including any standards, guidelines or principles for social responsibility the business employs. How the business translates its social responsibility policies into action, including any systems or procedures used.
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3.
The business’s evaluation of what has been achieved through social responsibility initiatives during the financial year, and any expectations it has regarding future initiatives.
If the business has not formulated any social responsibility policies, this must be reported.
WHAT DOES THE 21ST CENTURY BRING FORWARD? As said in the Introduction, enterprises are strategically motivated and organized by challenges that come from their environment. The answer to the question regarding the new features of enterprises in this century may be inferred from the answer to the question regarding the challenges, i.e. new opportunities and threats, coming from their environment, and the corresponding strategies adopted by them. Of course, not all enterprises are affected by their environment in the same way. What is a threat for an enterprise may be an opportunity for another. As an example, climate change, while posing threats to companies in the tourist industry in the south of Europe, at the same time creates opportunities in northern European counties. The same is true in the case of agriculture. Moreover, compliance with a risk may lead to the creation of new business opportunities. Which are the new opportunities and threats that modern enterprises have to consider in building their strategies? A hint to answering this question may be sourced from the insurance industry. Its activities have a direct reference to the activities of all other industries, and trends characterizing this sector reflect, at least some of them (the less sector-specific ones), trends characterizing the whole business world. Insuring is about anticipating uncertainties and risks (and related costs) in doing business. A recent report entitled “Strategic Business Risks 2008 - Insurance” identified a set of strategic threats, i.e. threats in the long run, for the insurance industry. The report was prepared by Ernst & Young, a global leader in assurance, tax, transaction and advisory service, in collaboration with Oxford Analytica, an international consulting firm (Ernst & Young, 2008a). More specifically, a pool of sector experts were asked, among others, to list and rate on a scale 1-10, with 1 having the most impact, the ten threats regarded as the most significant risks and challenges that the insurance industry will face over the next 3 to 5 years, and to provide commentary on why these are important to their industry. Threats are grouped in three categories: (1) macro-threats, i.e. threats that emerge from the general geopolitical and macroeconomic environment, (2) sector threats that emerge from trends or uncertainties that are reshaping the industry and (3) operational threats that have become so intense Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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that may impact the strategic performance of leading companies. Climate change was rated as the top strategic risk of the industry, followed by demographic shifts in core markets (second top risk) and catastrophic events (third top risk). These three top strategic risks are characterized in the report as far-reaching social and environmental trends and they are all “macro-threats”. It is interesting to note that some of the 10 top strategic risks for the insurance industry, other than climate change, identified in the above report are also partly related to it. Thus, number 3 strategic risk, catastrophic events, includes changing weather patterns (which is directly related to climate change), as explicitly stated in the report. Also included in the catastrophic events risk is pandemics, which is aggravated by climate change. Number 5 strategic risk, regulatory intervention, may be also regarded as partly linked with climate change. Indeed, politically driven interventions such as regulation are standard practice for governments pursuing control over business practices that aims at environmental protection and, more specifically, mitigation of climate change. Finally, number 9 and 10 strategic risks identified in the report, namely legal risk and geopolitical or macroeconomic shocks, may be considered to be also partly connected with climate change. Legal risk involves legal uncertainties over liabilities, which are affected by climate change, as in the case of liabilities caused by extreme weather events. On the other hand, geopolitical or macroeconomic shocks may be originated from large scale catastrophes caused by climate change, which may dramatically change the political or economic status of whole regions or countries. The above list, however, has been drastically changed in the latest Ernst & Young report available (Ernst & Young, 2009a), along with the recent dramatic developments, namely, the financial crisis and the global economic downturn. Financial market crisis is now the industry’s top strategic risk. It is followed by model risk (related to the shortcomings of models, such as their inability to incorporate correlations across different risks and operations, and the failure to recognize and to adequately capture the nature of underlying risks) and regulatory intervention. Geopolitical shocks appear now as number 5 among the industry’s top strategic risks, and legal risk appears as number 9. Important risk, but last of all in the list, at number 10, is climate change, forming now a group with catastrophic events. Probably this deterioration of climate change’s importance as a top issue of concern for the insurance industry will be coupled with a temporary shift in the global concern about climate change and its impacts on economy and society, at least as long as the financial crisis continues to shatter the world’s economy. The dramatic shift regarding strategic risks of the insurance industry noticed in the reports of Ernst & Young for the years 2008 and 2009 is identified also in the so called “Insurance Banana Skins survey” reports for the years 2007 and 2009. The surveys were conducted by the Centre for the Study of Financial Innovation (CSFI), Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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a non-profit think-tank, established in 1993 to look at future developments in the international financial field, particularly from the point of view of practitioners. Regulatory overkill, followed by natural catastrophes, management quality and climate change, were identified as the greatest risks facing the insurance industry by the CSFI’s Banana Skins survey (in association with PricewaterhouseCoopers LLP) in the year 2007 (PricewaterhouseCoopers, 2007). This result was based on a survey of 100 insurance industry representatives from 21 countries. However, year 2009’s survey is dominated by investment performance, equities and capital availability related risks. Indeed, these three strategic risks for the insurance industry are now ranking on top of all others in the list of risks, while too much regulation, natural catastrophes and climate change appear at numbers 5, 22 and 28, respectively (Lascelles, 2009). As noted in the report, “the only obvious reason for the sharp decline of what respondents last time described as the hot topic is that green issues have been downgraded by the recession” (Lascelles, 2009, p. 29). However, a come-back seems quite probable by some respondents to the survey, who point out that climate change is a long term issue, and will be very volatile in occurrence and impact. Indeed, some saw it not merely in terms of storms and floods but also in terms of consequences, such as the spread of tropical diseases. One respondent noticed that the combination of rising weather events and increased population concentrations in vulnerable areas would force insurers “up the learning curve” for new construction methods. However, there are still doubts in the industry as to whether climate change is a genuine issue, or merely one “got up” by the green lobby. As noted above, risks and challenges connected with the insurance industry may help identify the general trends characterizing the business world as a whole. Ernst &Young, in collaboration with Oxford Analytica, have conducted a series of studies, the so-called “radars”, concerning strategic risks for the world’s most important sectors. More specifically, reports have been publicized for 12 such sectors: asset management, automotive, banking and capital markets, biotechnology, consumer products, insurance, media and entertainment, oil and gas, pharmaceuticals, real estate, telecommunications and utilities. Sector-specific findings appear in these reports, regarding the strategic risks that each sector is facing. For example, the list of the top ten strategic risks for the automotive industry (Ernst &Young, 2008b) is topped by consolidation, restructuring and poor execution of mergers and acquisitions, followed by emerging markets, and cost controls and cash flow pressures. Note that none of these three top strategic risks belongs to the “macro-risk” category. Instead they belong to the sector or operational risks. The environmental concern is, however, present in the list: Environmental pressures, a typical macro-risk, appear as number 6 among the industry’s top strategic risks. It is noted that the auto industry, not unexpectedly, is under an increasing strain of Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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environmental pressures such as new regulations and consumers “going green”. Last in the list, at number 10, appear compliance risks due to globalization. This sector’s major risk includes divergent safety standards and environmental regulations. Another example is the asset management sector. The list of the top ten strategic risks for this sector is topped by the global financial shocks (Ernst &Young, 2008c). Notably, none of the ten top strategic risks is connected, at least directly, with environmental concerns, including climate change. The same is true for the consumer products sector (Ernst &Young, 2008d). However, although this sector appears to be facing only sector and operational risks, this does not mean that it is not exposed to shifts in the macro environment, as noted in the relevant report. The example of corn being channelled away from the food industry towards the energy industry for the production of biofuels shows that the sector is exposed to environmental and climate concerns, which typically belong to the macro business environment. More generally, strategic risks like product development and innovation, consumer demand shifts, pricing pressures and input price risks (cf. the corn example) and supply chain risks, among others, are all implicitly related with the demand to “go green”, i.e. with the environmental issue, including climate change. In addition to the above studies concerning strategic risks for a set of selected sectors among the world’s most important ones, Ernst &Young, in collaboration with Oxford Analytica, have issued studies concerning global business, based on interviews conducted with more than 70 analysts from around the world and from over 20 disciplines that shape the business environment. The aim of these interviews was to identify the emerging trends and uncertainties that will impact on businesses over the next five years. Thus, in a report released in 2008 (Ernst &Young, 2008e), the top 10 strategic risks for global organizations identified are the following: • • • • • • • • • •
Regulatory and compliance risk Global financial shocks Aging consumers and workforce The inability to capitalize on emerging markets Industry consolidation/transition Energy shocks Execution of strategic transactions Cost inflation Radical greening Consumer demand shifts.
Some of these top strategic risks are directly or indirectly related to the environment, including climate change. Thus, radical greening is directly applied to the increasing environmental concerns, which, as pointed out in the report, could be the Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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result of a wide range of pressures, from the voluntary world of CSR to hard regulatory and economic necessity. Two more top strategic risks are directly or indirectly related to the environment, including climate change: regulatory and compliance risk and energy shocks. As it is noted in the above report, the climate change debate has made the environment the biggest single issue in the public’s mind and the world is moving closer to zero tolerance for environmental accidents. It is argued that “the issue of climate change extends beyond just managing regulatory risk. Climate change and the regulatory and consumer response must be seen as a fundamental strategic challenge. We can expect a future of carbon labelling on products, carbon trading world-wide, and tight regulation and heavy taxes on carbon. Companies must make a fundamental decision about where they want to be in the new carbon economy”. The report concludes by noting that “change is constant in the market, so risks will change over time; so do our perceptions. If we had done this exercise 10 years ago, it is fair to question whether climate change would have featured so significantly. The climate was already changing, but our awareness of the fact and our perception of its importance was much different”. Change is constant in the market, indeed, and this took only a very short time to re-confirm. The top 10 risks identified in the next year’s Ernst & Young report (Ernst & Young, 2009b) that could have a significant impact on the business world over the next three to five years are the following (2008 rankings in parentheses): 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
The credit crunch (2) Regulation and compliance (1) Deepening recession (New) Radical greening (9) Non-traditional entrants (16) Cost cutting (8) Managing talent (11) Executing alliance and transactions (7) Business model redundancy (New) Reputation risks (22).
Thus, regulation and compliance is displaced from the top spot and comes now second to the credit crunch aftershocks and the deepening global recession, which is identified as the most important business risks for 2009. However, radical greening has now emerged at number 4 (having climbed from number 9), while regulatory and compliance risk (also related to environment) remains in the list, ranking very high (at number 2), and a new comer, reputation risks (well known
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from other reports already mentioned as a strategic risk), has emerged in the list as strategic risk number 10.
DISCUSSION AND CONCLUSION Some of the most important features of the modern enterprise’s environment, particularly those that are connected with climate change and its impacts on economy, supply chains and enterprises, have been discussed in this chapter. Undoubtedly, quality and sustainability have been core issues that have marked late 20th century’s business environment. Indeed, the last decades of the past century were marked by spectacular developments that changed drastically this environment. Enterprises had to adapt to these developments by adopting new paradigms based on the above concepts, quality and sustainability, and focusing on processes as value creators. Regarding quality, several definitions and approaches appeared during this period, including the Six Sigma approach (number of defects per million), the ISO 9000 series approach (viewing quality as the degree to which a set of inherent characteristics fulfill requirements), Juran’s definition (“fitness for use”, where fitness is defined by the customer), Tagushi’s definition (“uniformity around a target value”), Drucker’s definition (“quality is what the customer gets out and is willing to pay for”), etc. Correspondingly, several systems, methods and techniques for quality management were developed, including Six Sigma, Kaizen, Quality Circles, ISO 9000 series, QFD, Zero Defect Program, Total Quality Management (TQM), Business Process Re-engineering, etc. Irrespective of the particular system, method or technique applied, the quality movement continues to shape the landscape of management and company practices and is main-stream in the world of business more than ever. On the other hand, the sustainability movement gained great momentum during the same period. Sustainable development, defined by the World Commission on Environment and Development (known as the Brundtland Commission) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (http://www.worldbank.org/depweb/ english/sd.html), has never stopped being an issue of major concern as it has serious environmental, economic, social and cultural dimensions. Sustainability’s implications affect fields as diverse as science and engineering, environment and ecology, economics and business, sociology and philosophy, and many others. Addressing sustainability requires consideration of resource use (materials and energy), economic and social development, health, environmental stewardship, engineering methods and design, and architecture, as well as an understanding of how people interact and relate in addressing these factors (Rosen, 2009).
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More specifically, at supply chains’ level several models for environmental performance analysis, design and operation have been proposed, e.g. (Tsoulfas & Pappis, 2006, 2008), while at company’s level, and as far as climate change is concerned, companies have developed different strategies to deal with climate change over the years, as noted by (Kolk & Pinkse, 2007). Initially these strategies were more political (non-market) in nature. Currently, however, they are also marketoriented. Companies’ political positions have gradually changed since 1995. Instead of opposing climate measures, companies are adopting a more proactive approach or at least a ‘‘wait-and-see’’ attitude, and many have started to take market steps to be prepared to deal with regulation, or to go beyond that, considering risks and opportunities. Some companies apparently rely on the course set by their national governments following the adoption of the Kyoto protocol, and wait until the actual implementation of climate policy is effected before they take action. Others, however, have decided to launch initiatives for emission reduction to anticipate future policy, societal or competitive developments, thus facilitating compliance or the development of green resources and capabilities (Kolk & Pinkse, 2004, 2005). Quality and sustainability may be traced at the core of what have been regarded in this book as the probably most fundamental topics for enterprises that emerged during the late 20th century: extended enterprise and CSR. These two issues may be considered as the two most important distinctive features of businesses inherited by the previous to the new, 21st, century and have been presented in this chapter. It should be noticed that very important issues, notably information and communication technology, globalization and trade explosion, that have marked the last part of the 20th century and will certainly continue to impact on enterprises, have not been discussed. It was felt, however, that this discussion would be much less relevant to the main theme of this book, climate change, and would go beyond its scope, compared with the discussion about extended enterprise and CSR. The new organization model, extended enterprise, according to which enterprises transcend their traditional boundaries to form a web of collaborating enterprises and other entities (e.g. customers), is based on the commitment of the web participants to work closely in order to coordinate order generation, order taking, and order fulfilment. Extended enterprise is the end result of developments that took place particularly during the 1980’s and 1990’s which changed the market conditions, including company specialization, process standardization, quality management, the advances in information and communication technology and globalization of trade. Variations do exist in real life applications of this concept. Fundamental differences also characterize the approaches used in different models that have been developed (e.g. process modelling, object-oriented modelling, and the Multi Agent System). Each of these models satisfies some particular needs and has its own application
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24 The Enterprise in the 21st Century
area where it can be used to its best advantage (Szegheo & Andersen, 2001). Despite differences either in the way the system is configured or actually realized, the extended enterprise is the dominant organizational paradigm inherited by the 20th century to the enterprises of the modern world. CSR is the second imperative inherited by the previous to the new century. Companies should be managed with the objective to optimize their economic, social and environmental performance in view of the expectations and needs of stakeholders, but also to bring competitive advantage. Therefore central to CSR is the concept of stakeholders, who may be defined broadly as those groups or individuals: (a) that can reasonably be expected to be significantly affected by the organization’s activities, products, and/or services; or (b) whose actions can reasonably be expected to affect the ability of the organization to successfully implement its strategies and achieve its objectives (Global Reporting Initiative, 2006). Companies may engage in CSR activities for different reasons: build customer loyalty and enhance reputation, respond to industry codes of conduct, prevent regulatory or legal sanction, manage risks, meet requirements posed by partners, respond to NGO requests etc. Furthermore, they may align with the current trends in management and act being motivated by their organizational culture. Weber (2008) identifies five main areas of CSR business benefits: 1. 2. 3. 4. 5.
Positive effects on company image and reputation Positive effects on employee motivation, retention, and recruitment Cost savings Revenue increases from higher sales and market share CSR-related risk reduction or management.
In addition, it is pointed out that these benefits, which can influence a company’s competitiveness and economic success, may be monetary as well as non-monetary. Moreover, the benefits of CSR engagement go beyond the boundaries of a single company and involve societies in general. That is why effective CSR vision is inextricable with cooperation among all the stakeholders and partners. Certainly though, the position of companies in the value chain may be determinant with respect to CSR engagement, since ‘close to markets’ companies may be more concerned on such activities compared to ‘business-to-business’ companies (Haddock-Fraser & Fraser, 2007). Environmental, together with economic and social, performance may be monitored though sustainability reporting, that is, the practice of measuring, disclosing, and being accountable for organizational performance while working towards the goal of sustainable development. In a sustainability report, a balanced and reasonable representation of the sustainability performance of the reporting organization is Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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provided, including both positive and negative contributions. Among several others, GRI provides a sustainability report framework, where all reporting components are developed using a global, multi-stakeholder consensus seeking approach. While one may assume that the concepts of extended enterprise and CSR, and related practices, are deeply rooted in business and will continue to shape companies’ organization during the next decades, new challenges and trends may be traced during the first years of the new century. It is impressive how fast the business environment is changing, re-arranging priorities and imposing new requirements that companies have to respect in order to survive. At the same time, challenges change location, where they manifest themselves. They change character, too. And they are changing as time goes by. Reports by sector show the new trends and challenges facing companies in each sector, while hints regarding the most significant strategic risks and challenges for the business world may be inferred from reports referring to the insurance industry. Such macro-threats, i.e. threats that emerge from the general geopolitical and macroeconomic environment, include climate change, which has been recently rated as the top strategic risk of the insurance industry, and also some of the other top strategic risks for this industry that are partly related to climate change, like catastrophic events etc. However, the importance of different strategic challenges that are characteristic of some time period may change drastically in subsequent periods due to extreme events of ecumenical or peripheral significance. This has been proven dramatically during the financial crisis and the economic downturn that hit the globe recently. Thus, in the 2009 report for the insurance industry, financial market crisis emerged as the industry’s top strategic risk while climate change fell at number 10 of the risks list, forming a group with catastrophic events. It may be safely argued, though, that this new image, will be temporary and last only as long as the financial crisis continues. Climate change will continue to be considered by the global community, including enterprises, as a critical challenge for many years to come, as will be shown in the sequel.
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EIA. (2008b). Comparing China and U.S. GHG Emissions in 2005. ChinaFAQs: The Network for Climate and Energy Information. Convened by the World Resources Institute. Retrieved on December 15, 2009, from http://www.chinafaqs.org Ernst & Young. (2008a). Strategic Business Risk: Insurance. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www.ey.com/Publication/ vwLUAssets/Industry_Insurance_StrategicBusinessRisk_2008/$FILE/Industry_Insurance_StrategicBusinessRisk_2008.pdf Ernst & Young. (2008b). Strategic Business Risk: Automotive 2008. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www.ey.com/Publication/vwLUAssets/Industry_Automotive_Strategic_Business_Risk_2008/$FILE/ Industry_Automotive_Strategic_Business_Risk_2008.pdf Ernst & Young. (2008c). Strategic Business Risk: Assets Management 2008. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www. ey.com/Publication/vwLUAssets/Industry_AM_SBR/$File/Industry_AM_SBR.pdf Ernst & Young. (2008d). Strategic Business Risk: Consumer products 2008. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www.ey.com/ Publication/vwLUAssets/Industry_CP_Strategic_Business_Risk_2008/$FILE/ StrategicBusinessRisk_CP_March08.pdf Ernst & Young. (2008e). Strategic Business Risk 2008. The 10 top risks for business. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www. ey.com/Publication/vwLUAssets/2009_business_risk_report/$FILE/2009_business_risk_report.pdf Ernst & Young. (2009a). Second annual business risk report – Insurance 2009. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www. ey.com/Publication/vwLUAssets/Second_annual_business_risk_report/$FILE/ Industry_Insurance_Second_annual_business_risk_report_2009.pdf Ernst & Young. (2009b). Global megatrends 2009. In collaboration with Oxford Analytica. Retrieved June 29, 2009, from http://www.ey.com/Publication/vwLUAssets/Global_megatrends_2009/$file/Global_megatrends_2009.pdf Europe, C. S. R. (2009). A European roadmap for businesses - Towards a Sustainable and Competitive Enterprise. Retrieved July 16, 2009, from http://www.csreurope. org/pages/en/roadmap.html European Commission. (2001). Promoting a European framework for Corporate Social Responsibility. COM (2001) 366. Retrieved July 16, 2009, from http://eurlex.europa.eu/LexUriServ/site/en/com/2001/com2001_0366en01.pdf Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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European Commission. (2002). Corporate Social Responsibility: a business contribution to Sustainable Development. COM (2002) 347 final. Retrieved July 16, 2009, from http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=COM:2002:0347:FIN:EN:pdf European Commission. (2006). Implementing the partnership for growth and jobs: making Europe a pole of excellence on corporate social responsibility. COM (2006) 136 final. Retrieved July 16, 2009, from http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2006:0136:FIN:EN:PDF Friedman, M. (1970). The social responsibility of business is to increase profits. Retrieved July 16, 2009, from http://www.colorado.edu/studentgroups/libertarians/ issues/friedman-soc-resp-business.html Global Compact, U. N. (2008). Corporate Citizenship in the World Economy. Retrieved July 16, 2009, from http://www.unglobalcompact.org/docs/news_events/8.1/ GC_brochure_FINAL.pdf Global Reporting Initiative. (2006). Sustainability Reporting Guidelines. Retrieved July 16, 2009, from http://www.globalreporting.org/NR/rdonlyres/ED9E9B36AB54-4DE1-BFF2-5F735235CA44/0/G3_GuidelinesENU.pdf Government of Canada. (2009). Corporate Social Responsibility – An Implementation Guide for Canadian Business. Retrieved July 16, 2009, from http://www. strategis.ic.gc.ca/csr Haddock-Fraser, J., & Fraser, I. (2007). Assessing Corporate Environmental Reporting Motivations: Differences Between ‘Close-to-Market’ and ‘Business-to-Business’ Companies. Corporate Social Responsibility and Environmental Management, 15, 140–155. doi:10.1002/csr.147 Kolk, A., & Pinkse, J. (2004). Market strategies for climate change. European Management Journal, 22(3), 304–314. doi:10.1016/j.emj.2004.04.011 Kolk, A., & Pinkse, J. (2005). Business responses to climate change: identifying emergent strategies. California Management Review, 47(3), 6–20. Kolk, A., & Pinkse, J. (2007). Towards strategic stakeholder management? Integrating perspectives on sustainability challenges such as corporate responses to climate change. Corporate Governance, 7(4), 370–378. doi:10.1108/14720700710820452 Lascelles, D. (2009). Insurance Banana Skins 2009. The CSFI survey of the risks facing insurers. New York: Centre for the Study of Financial Innovation (in association with PricewaterhouseCoopers LPP). Retrieved June 20, 2009, from http:// sup.kathimerini.gr/xtra/media/files/meletes/klad/asfal110309.pdf Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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PricewaterhouseCoopers. (2007). Too much regulation’ tops insurance risks. Centre for the Study of Financial Innovation [Press release]. Retrieved June 29, 2009, from http://www.pwc.com/Extweb/pwcpublications.nsf/docid/24EE97F5BC33970D852 572E9006A8021/$File/skins_press_release.pdf Rosen, M. A. (2009). Sustainability: A Crucial Quest for Humanity. Sustainability, 1, 1–4..doi:10.3390/su1010001 Schekkerman, J. (2004). Another View at Extended Enterprise Architecture Viewpoints. Institute for Enterprise Architecture Developments. Retrieved July 10, 2009, from http://www.via-nova-architectura.org/files/LAC2004/Schekkerman.pdf Schekkerman, J. (2006). Extended Enterprise Architecture Maturity Model Support Guide. Institute for Enterprise Architecture Developments. Retrieved July 10, 2009, from http://www.enterprise-architecture.info/Images/E2AF/Extended%20 Enterprise%20Architecture%20Maturity%20Model%20Guide%20v2.pdf Seligsohn, D., Heilmayr, R., Tan, X., & Weischer, L. (2009a). International Comparison of GHG Emissions by Sector in 2005. In China, the United States, and the Climate Change Challenge. Washington, DC: World Resources Institute. Retrieved on December 15, 2009, from http://www.wri.org/publication/china-united-statesclimate-change-challenge Seligsohn, D., Heilmayr, R., Tan, X., & Weischer, L. (2009b). Energy consumption by sector in 2007 in China, India, Japan, Russia, EU-27, and the United States. In China, the United States, and the Climate Change Challenge. Washington, DC: World Resources Institute. Retrieved on December 15, 2009, from http://www.wri. org/publication/china-united-states-climate-change-challenge Seligsohn, D., Heilmayr, R., Tan, X., & Weischer, L. (2009c). U.S. Energy Intensity by Industry. In China, the United States, and the Climate Change Challenge. Washington, DC: World Resources Institute. Retrieved on December 15, 2009, from http://www.wri.org/publication/china-united-states-climate-change-challenge Szegheo, O., & Andersen, B. (2001). Modeling the Extended Enterprise: A Comparison of Different Modeling Approaches. Retrieved July 14, 2009, from http:// www.prestasjonsledelse.net/publikasjoner/Modelling%20the%20extended%20 enterprise-IEMC.pdf Tsoulfas, G. T., & Pappis, C. P. (2006). Environmental principles applicable to supply chains design and operation. Journal of Cleaner Production, 14(18), 1593–1602. doi:10.1016/j.jclepro.2005.05.021
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Tsoulfas, G. T., & Pappis, C. P. (2008). A model for supply chains environmental performance analysis and decision making. Journal of Cleaner Production, 16(15), 1647–1657. doi:10.1016/j.jclepro.2008.04.018 UN ISAR. (2009). United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting. Retrieved July 16, 2009, from http://www.unctad.org/Templates/Startpage.asp?intItemID=2531 Weber, M. (2008). The Business Case for Corporate Social Responsibility: A company-level Measurement Approach for CSR. European Management Journal, 26, 247–261. doi:10.1016/j.emj.2008.01.006
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Chapter 2
Global Warming: Basic Facts
INTRODUCTION As noted in the previous chapter, climate change has emerged in recent years as one of the most critical topics at almost all levels of decision making, both private and public. This constitutes a radical change compared to the common perception only a few years ago. Climate change, a result of global warming, is a reality of universal acceptance, affecting in many ways the life of human societies as well as the environment. Continuing research over the last decades has established concrete knowledge of the basic facts about the results of interactive processes in the Earth system,which determine climate and climate change. It has particularly shown the anthropogenic influences on these processes. There is no doubt that human activities are the critical cause of the changes in the climate that Earth is experiencing since DOI: 10.4018/978-1-61692-800-1.ch002 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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the Industrial Revolution in the mid-18th century, i.e. since the time that a period of rapid industrial growth with far reaching social and economic consequences begun in Britain and spread to Europe and other countries all over the world. The industrial revolution marked the beginning of a dramatic increase in the use of fossil fuels, which is the main cause of climate change. This chapter, which aims to introduce the basic facts of global warming, is almost exclusively based on the latest UN’s Intergovernmental Panel on Climate Change (IPCC) Report (IPCC, 2007), particularly on Working Group I’s Fourth Assessment Report on the Physical Science Basis of Climate Change (IPCC, 2007a), agreed in February 2007, called the “Report” in the sequel of this chapter. Although the Report, despite its grave conclusions about the future of the Earth’s climate, has been criticized as a rather optimistic treatment of the subject, it has gained widespread acceptance as it is supported by the most recent and reliable scientific evidence available. Indeed, the Report has been based on concrete scientific findings characterized by a certainty equal or greater than 90%, while ignoring less certain but more pessimistic scenarios. The Report, however, has been amended in the IPCC’s synthesis report published in November 2007, which highlights the risk of very large (negative) impacts of the global warming effect on the Earth’s climate. The Report is a detailed account of the latest scientific findings on climate change, and more specifically on the changes, due to global warming, in atmospheric constituents and in radiative forcing (the term is defined in the sequel). It summarizes observations regarding surface and atmospheric climate change, changes in snow, ice and frozen ground and oceanic climate change and sea level. While starting with a historical overview of Climate Change Science, it also covers subjects such as Palaeoclimate, couplings between changes in the Climate System and Biogeochemistry, climate models and their evaluation and global and regional climate projections. Understanding and attributing climate change is also treated in the Report. Additionally, the Report provides a Summary for Policymakers, a Technical Summary and an “Uncertainty Guidance Note”. Several annexes are also included, such as glossary, authors and reviewers annexes. A fundamental contention of the Report is that the cause of climate change is human activities after the Industrial Revolution. The Report points out that, since the IPCC First Assessment Report in 1990, and as climate science and the Earth’s climate have continued to evolve over recent decades, increasing evidence of anthropogenic influences on climate change has been found. Correspondingly, the IPCC has made increasingly more definitive statements in its successive reports about human impacts on climate. Debate has stimulated a wide variety of climate change research. The results of this research have refined but not significantly redirected the main scientific conclusions from the sequence of IPCC assessments.
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While the above will be analytically presented in this chapter, in order to introduce the subject, a schematic framework representing anthropogenic drivers, impacts of, and responses to climate change, and their linkages is given in Figure 1 (IPCC, 2007, p. 26). The technical terms used throughout this chapter are defined according to the Glossary of the Report, included in its Annex I. Effort has been made in order to restrict the technical terms used to the least possible. It is recommended that the interested reader visit part ar4-wg1-annexes of Working Group I’s Fourth Assessment Report on the Physical Science Basis of Climate Change (IPCC, 2007a).
THE GREENHOUSE EFFECT The Greenhouse Effect, which accounts for climate change, refers to the change in the thermal equilibrium temperature of a planet or moon by the presence of an atmosphere containing gas that absorbs infrared radiation. More specifically, in the case of Earth, it is a physical process, by which a part of the thermal radiation emitted by the land and ocean is absorbed by the atmosphere and is reradiated back to Earth. As it is explained in the Report, the Sun powers Earth’s climate, radiating energy at very short wavelengths, predominantly in the visible or near-visible (e.g. ultraviolet) part of the spectrum. Roughly one-third of the solar energy that reaches the top of Earth’s atmosphere is reflected directly back to space. The remaining two-thirds are absorbed by the surface and, to a lesser extent, by the atmosphere. To balance the absorbed incoming energy, the Earth must, on average, radiate the Figure 1. Schematic framework of anthropogenic climate change drivers, impacts and responses. (Source: IPCC, 2007)
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Global Warming 33
same amount of energy back to space. Because the Earth is much colder than the Sun, it radiates at much longer wavelengths, primarily in the infrared part of the spectrum, as shown in Figure 2 (IPCC, 2007b, p. 98). Much of this thermal radiation emitted by the land and ocean is absorbed by the atmosphere, including clouds, and is reradiated back to Earth. This mechanism is fundamentally different from the mechanism of an actual greenhouse, which instead isolates air inside the structure so that heat is not lost by convection and conduction. The reason for using the term “greenhouse” to describe the effect is that glass walls in a greenhouse reduce airflow and increase the temperature of the air inside. Analogously, but through a different physical process, the Earth’s Greenhouse Effect warms the surface of the planet. Without the natural Greenhouse Effect, the average temperature at Earth’s surface would be below the freezing point of water. Thus, Earth’s natural Greenhouse Effect makes life as we know it possible. In the absence of the Greenhouse Effect, the Earth’s average surface temperature of 14 °C would be about -18 °C. However, human activities, primarily the burning of fossil fuels and clearing of forests, have greatly intensified the natural Greenhouse Effect, causing global warming. As pointed out in the Report, the Greenhouse Effect comes from the so-called “greenhouse gases” (GHGs), that is, molecules that are more complex and much less common than the two most abundant gases in the atmosphere, namely nitrogen (comprising 78% of the dry atmosphere) and oxygen (comprising 21%), which exert almost no Greenhouse Effect. Apart from water vapor, GHGs include several gases, such as carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), halocarbons and sulphur hexafluoride (SF6).
Figure 2. An idealized model of the natural Greenhouse Effect. (Source IPCC, 2007a)
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Of all GHGs, water vapor is the most important one. Carbon dioxide is the second-most important GHG, a naturally occurring gas or a by-product of burning fossil fuels from fossil carbon deposits, such as oil, gas and coal, of burning biomass and of land use changes, and of other industrial processes. It is the principal anthropogenic GHG and the reference gas, against which other GHGs are measured. In the humid equatorial regions, where there is so much water vapor in the air that the Greenhouse Effect is very large, adding a small additional amount of CO2 or water vapor has only a small direct impact on downward infrared radiation. However, in the cold and dry polar regions, the effect of a small increase in CO2 or water vapor is much greater. The same is true for the cold, dry upper atmosphere, where a small increase in water vapor has a greater influence on the Greenhouse Effect than the same change in water vapor would have near the surface. Several components of the climate system, notably the oceans and living beings, affect atmospheric concentrations of GHGs. A prime example of this is plants taking CO2 out of the atmosphere and converting it (and water) into carbohydrates via photosynthesis. In the industrial era, human activities have added GHGs to the atmosphere, primarily through the burning of fossil fuels and clearing of forests. Adding more of a GHG, such as CO2, to the atmosphere intensifies the Greenhouse Effect, thus warming Earth’s climate. The amount of warming depends on various feedback mechanisms. For example, as the atmosphere warms due to rising levels of GHGs, its concentration of water vapor increases, further intensifying the Greenhouse Effect. This in turn causes more warming, which causes an additional increase in water vapor, in a self-reinforcing cycle. This water vapor feedback may be strong enough to approximately double the increase in the Greenhouse Effect due to the added CO2 alone. Additional important feedback mechanisms involve clouds. Clouds are effective at absorbing infrared radiation and therefore exert a large Greenhouse Effect, thus warming the Earth. Clouds are also effective at reflecting away incoming solar radiation, thus cooling the Earth. A change in almost any aspect of clouds, such as their type, location, water content, cloud altitude, particle size and shape, or lifetimes, affects the degree, to which clouds warm or cool the Earth. Some changes amplify warming while others diminish it. The Greenhouse Effect is one of several factors which affect the temperature of the Earth. Other positive and negative feedbacks dampen or amplify the Greenhouse Effect.
THE IPCC’S REPORTS Much of the present worldwide awareness of the Greenhouse Effect is due to the reports of IPCC (http://www.ipcc.ch), particularly the Assessment Reports, which Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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influenced decisively the world’s governments directing them towards taking specific adaptation and mitigation actions, i.e. interventions to reduce the sources or enhance the sinks of GHGs, in order to cope with climate change. The IPCC is a scientific intergovernmental body set up in 1988 by the World Meteorological Organization (WMO) and by the United Nations Environment Programme (UNEP). The IPCC was established to provide the decision-makers and others interested in climate change with an objective source of information about climate change. As climate change is a very complex issue, policymakers need such a source of information about its causes, its potential environmental and socio-economic consequences and the adaptation and mitigation options to respond to it. The IPCC does not conduct any research nor does it monitor climate related data or parameters. Its role is to assess on a comprehensive, objective, open and transparent basis the latest scientific, technical and socio-economic literature produced worldwide relevant to the understanding of the risk of human-induced climate change, its observed and projected impacts and options for adaptation and mitigation. Thus the information provided by ICCP with its reports is based on scientific evidence and reflects existing viewpoints within the scientific community. The comprehensiveness of the scientific content is achieved through contributions from experts in all regions of the world and all relevant disciplines including, where appropriately documented, industry literature and traditional practices, and a two-stage review process by experts and governments. Because of its intergovernmental nature, the IPCC is able to provide scientific technical and socio-economic information in a policy-relevant but policy neutral way to decision makers. When governments accept the IPCC reports and approve their Summary for Policymakers, they acknowledge the legitimacy of their scientific content. The IPCC provides at regular intervals its reports, which immediately become standard works of reference, widely used by policymakers, experts and researchers. The findings of the first IPCC Assessment Report of 1990 played a decisive role in leading to the United Nations Framework Convention on Climate Change (UNFCCC), which was adopted on 9 May 1992 in New York and was signed in the Rio de Janeiro Summit in 1992 by more than 150 countries and the European Community. It entered into force in 1994 and its ultimate objective was the stabilization of GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. It contained commitments for all Parties and provided the overall policy framework for addressing the climate change issue. The IPCC Second Assessment Report of 1995 provided key inputs for the negotiations of the Kyoto Protocol in 1997, while the Third Assessment Report of 2001 as well as Special and Methodology Reports provided further information relevant for the development of the UNFCCC and the Kyoto Protocol. The Kyoto Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Protocol was adopted in Kyoto, Japan, at the Third Session of the Conference of the Parties to the UNFCCC and entered into force on 16 February 2005. It contains legally binding commitments, in addition to those included in the UNFCCC, for most Organization for Economic Co-operation and Development (OECD) countries and many countries with economies in transition. These countries agreed to reduce six anthropogenic GHG emissions, namely carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride by at least 5% below 1990 levels in the commitment period 2008 to 2012. The latest Assessment Report (4th Assessment Report) is “Climate Change 2007”, which is the main referenced source of this chapter, while the process towards the 5th Assessment Report has already begun. The IPCC reports continue to be major sources of information for the negotiations under the UNFCCC.
Changes in Atmospheric Constituents and in Radiative Forcing As said earlier, much of the thermal radiation, which is emitted by the land and ocean and which has its origin in the Sun, is absorbed by the atmosphere, including clouds, and is reradiated back to the Earth. This is actually the “Greenhouse Effect”. In order to understand the mechanism of this effect, a particularly useful concept is that of Radiative Forcing (the term “forcing”, which is used also elsewhere in this chapter, is a technical one meaning the capacity of an agent – like a GHG – to do work or cause physical change). Radiative Forcing (RF) is used for quantitative comparisons of the strength of different human and natural agents in causing climate change. In climate science, RF is (loosely) defined as the change in net irradiance at the tropopause, i.e. the boundary between the troposphere and the stratosphere. Troposphere is the lowest part of the atmosphere, from the Earth’s surface to about 10 km in altitude at mid-latitudes (ranging from 9 km at high latitudes to 16 km in the tropics on average), where clouds and weather phenomena occur. In the troposphere, temperatures generally decrease with height. Stratosphere is the highly stratified region of the atmosphere above the troposphere extending from about 10 km (ranging from 9 km at high latitudes to 16 km in the tropics on average) to about 50 km altitude. “Net irradiance” is the difference between the incoming and the outgoing radiation energy in a given climate system and is measured in Watts per square meter. The change is the measured difference relative to the year 1750, the defined starting point of the industrial era. A positive forcing (more incoming than outgoing energy) tends to warm the system, while a negative forcing (more outgoing than incoming energy) tends to cool it. Possible sources of RF are changes in insolation, that is, in the amount of solar radiation reaching the Earth, or the effects of variations in the amount of radiatively active gases and aerosols present. For the IPCC, unless otherwise noted, RF refers to a global and annual average value. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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In Figure 3, the main Earth’s energy agents are shown and an estimate is given of the Earth’s annual and global mean energy balance (IPCC, 2007b, p. 94). Estimates of RF are accompanied by an uncertainty range (value uncertainty) and a level of scientific understanding (structural uncertainty). The value uncertainties represent the 5 to 95% (90%) confidence range, and are based on available published studies. Thus, each RF estimate is given by a number, positive or negative, corresponding to the best estimate, followed by two numbers in square brackets that determine the 90% confidence range, which may be symmetric or asymmetric about the best estimate. The level of scientific understanding is a subjective measure of structural uncertainty and represents how well understood the underlying processes are. Climate change agents with a high level of scientific understanding are expected to have an RF that falls within their respective uncertainty ranges. According to the Report, particularly chapter 2 of the Working Group I Report on the Physical Science Basis of Climate Change (Forster et al., 2007) focusing on the changes in atmospheric constituents and in RF, the combined anthropogenic RF is estimated to be +1.6 [–1.0, +0.8] W per m2 (in this case the confidence range is asymmetric about a best estimate of +1.6). Anthropogenic RF indicates that, since 1750, it is extremely likely that humans have exerted a substantial warming influence on climate (‘extremely likely’ represents a 95% confidence level or higher, whereas ‘likely’ represents a 66% confidence level or higher). This RF estimate is likely to be at least five times greater than that due to solar irradiance changes. For the period 1950 to 2005, it is exceptionally unlikely that the combined natural RF (solar irradiance plus volcanic aerosol) has had a warming influence comparable to that of the combined anthropogenic RF. Increasing concentrations of the long-lived GHGs have led to a combined RF of +2.63 [±0.26] W per m2. Their RF has a high level of scientific understanding. Figure 3. Estimate of the Earth’s annual and global mean energy balance. (Source: IPCC, 2007b)
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The 9% increase in this RF since IPCC’s Third Assessment Report is the result of concentration changes since 1998. Relevant to RF is the term “Global Warming Potential” (GWP), which, according to the Report, is an index, based upon radiative properties of well-mixed GHGs, measuring the RF of a unit mass of a given well-mixed GHGs in the present-day atmosphere integrated over a chosen time horizon, relative to that of carbon dioxide. The GWP represents the combined effect of the differing times that these gases remain in the atmosphere, and their relative effectiveness in absorbing outgoing thermal infrared radiation. The Kyoto Protocol is based on GWPs from pulse emissions over a 100-year time frame. Carbon dioxide, which, as said earlier, is the second-most important GHG, after vapor, has a GWP of 1. The main findings of the Report on the changes in atmospheric constituents and in RF are summarized as follows:
CO2 Its global mean concentration in 2005 was 379 ppm (parts per million), leading to an RF of +1.66 [±0.17] W per m2. Past emissions of fossil fuels and cement production have likely contributed about three-quarters of the current RF. The remainder has been caused by land use changes. The growth rate of CO2 in the atmosphere during the 1995 to 2005 decade was 1.9 ppm per year and the CO2 RF increased by 20%. This, according to the Report, is the largest change observed or inferred for any decade in at least the last 200 years. From 1999 to 2005, global emissions from fossil fuel and cement production increased at a rate of roughly 3% per year.
CH4 Its global mean concentration in 2005 was 1,774 ppb (parts per billion), contributing an RF of +0.48 [±0.05] W per m2. Its growth rates in the atmosphere over the past two decades have generally decreased. The cause of this decrease is not well understood, however, this and the negligible long-term change in its main sink (the hydroxyl radical OH) imply that total CH4 emissions are not increasing.
Montreal Protocol Gases These gases, accounting for the destruction of stratospheric ozone, include chlorofluorocarbons (CFCs), hydrochlorofluorocarbons (HCFCs) and chlorocarbons, and contributed +0.32 [±0.03] W per m2 to the RF in 2005. Their RF peaked in 2003 and is now beginning to decline.
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Nitrous Oxide It continues to rise approximately linearly (0.26% per year) and reached a concentration of 319 ppb in 2005, contributing an RF of +0.16 [±0.02] W per m2. Recent studies have reinforced the large role of emissions from tropical regions in influencing the observed spatial concentration gradients.
Fluorine-Containing Gases Concentrations of many of the fluorine-containing Kyoto Protocol gases (including hydrofluorocarbons (HFCs), perfluorocarbons, and SF6) have increased by large factors (between 4.3 and 1.3) between 1998 and 2005. Their total RF in 2005 was +0.017 [±0.002] W per m2 and is rapidly increasing by roughly 10% per year. The lifetimes, thus RF values, of CH4, HFCs, HCFCs and ozone are influenced by the reactive gas, OH, a key chemical species. This gas plays an important role also in the formation of sulphate, nitrate and some organic aerosol species. Estimates of the global average OH concentration have shown no detectable net change between 1979 and 2004. The Report goes on with more findings on the RF of other agents, including ozone, aerosol direct and cloud albedo (the fraction of solar radiation reflected by clouds) effects, linear contrails from aviation and land use changes. However these agents either have smaller impact on the Greenhouse Effect or tend to decrease it, while the findings in several cases have considerable uncertainties and are characterized by a low or medium level of scientific understanding. In Figure 4 the atmospheric concentrations of the three most important long-lived GHGs over the last 2,000 years are shown (Forster et al., 2007, p. 135). Increases since about 1750 are attributed to human activities in the industrial era.
Surface and Atmospheric Climate Change In chapter 3 of the Working Group I Report on the Physical Science Basis of Climate Change (Trenberth et al., 2007), under the title “Observations: Surface and Atmospheric Climate change”, observed climate changes in the land surface and atmosphere are assessed. In particular, observations concerning surface climate change, including temperature, precipitation, drought and surface hydrology, as well as observations concerning changes in the free atmosphere and in atmospheric circulation are reported. Observations concerning patterns of atmospheric circulation variability as well as changes in the Tropics and Subtropics, in the monsoons and in extreme events are also included.
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The changes reported are substantial. For example, it is shown that surface temperature, examined already in the Third Assessment Report published in 2001, for three sub-periods (1910–1945, 1946–1975 and 1976–2000), had been rising during the first and third sub-periods, while relatively stable global mean temperatures have been observed during the second sub-period. The 1976 divide is the date of a widely acknowledged ‘climate shift’ (Trenberth, 1990) and seems to mark a time when global mean temperatures began a discernible upward trend. This trend has been at least partly attributed to increases in GHG concentrations in the atmosphere. Observations regarding surface and atmospheric climate change are summarized in chapter 3 of the Working Group I Report and include, among others, the following:
Global Mean Surface Temperatures Rising Global mean surface temperatures have risen by 0.74°C ± 0.18°C when estimated by a linear trend over the last 100 years (1906–2005). The rate of warming over the last 50 years is almost double that over the last 100 years (0.13°C± 0.03°C vs. 0.07°C ± 0.02°C per decade). Global mean temperatures averaged over land and ocean surfaces are consistent within uncertainty estimates over the period 1901 to 2005 and show similar rates of increase in recent decades. An important finding is that the trend is not linear, and the warming from the first 50 years of instrumental record (1850–1899) to the last 5 years (2001–2005) is 0.76°C ± 0.19°C.
Warmest Years 2005 was one of the two warmest years on record. The warmest years in the instrumental record of global surface temperatures are 1998 and 2005, with 1998 ranking Figure 4. Atmospheric concentrations of important long-lived GHGs over the last 2,000 years. (Source: Forster et al., 2007)
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first in one estimate, but with 2005 slightly higher in the other two estimates. 2002 to 2004 are the 3rd, 4th and 5th warmest years in the series since 1850. Eleven of the last 12 years (1995 to 2006) – the exception being 1996 – rank among the 12 warmest years on record since 1850. Surface temperatures in 1998 were enhanced by the major 1997–1998 El Niño (a basin-wide warming of the tropical Pacific Ocean east of the dateline) but no such strong anomaly was present in 2005. Temperatures in 2006 were similar to the average of the past 5 years.
Land Regions Warming Faster than the Oceans Warming has occurred in both land and ocean domains, and in both sea surface temperature and night time marine air temperature over the oceans. However, for the globe as a whole, surface air temperatures over land have risen at about double the ocean rate after 1979 (more than 0.27°C per decade vs. 0.13°C per decade), with the greatest warming during winter (December to February) and spring (March to May) in the Northern Hemisphere.
Extremes of Temperature Consistent with Climate Warming Changes in extremes of temperature are also consistent with warming of the climate. Observations in 70 to 75% of the land regions where data are available show a widespread reduction in the number of frost days in mid-latitude regions, an increase in the number of warm extremes and a reduction in the number of daily cold extremes. The most marked changes are for cold (lowest 10%, based on 1961–1990) nights, which have become rarer over the 1951 to 2003 period. Warm (highest 10%) nights have become more frequent. Temperature range during the day decreased by 0.07°C per decade averaged over 1950 to 2004, but had little change from 1979 to 2004, as both maximum and minimum temperatures rose at similar rates. The Report refers to the record-breaking heat wave over western and central Europe in the summer of 2003 as an example of an exceptional recent extreme. That summer, from June to August, 2003, was the hottest since comparable instrumental records began around 1780 (1.4°C above the previous warmest in 1807) and is very likely to have been the hottest since at least 1500.
Warming Strongly Evident at All Latitudes in Sea Surface Temperatures Recent warming is strongly evident at all latitudes in sea surface temperatures over each of the oceans. However, there are inter-hemispheric differences in warming in the Atlantic, the Pacific is punctuated by El Niño events and Pacific decadal variCopyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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ability that is more symmetric about the equator, while the Indian Ocean exhibits steadier warming. These characteristics lead to important differences in regional rates of surface ocean warming. These differences affect the atmospheric circulation.
Urban Heat Island Effects Local urban heat island effects have been observed, that have not biased the largescale trends. Effects of urbanization and land use change on the land-based temperature record, as indicated by a number of recent studies, are negligible (0.006ºC per decade) as far as hemispheric- and continental-scale averages are concerned because the very real but local effects are avoided or accounted for in the data sets used. These effects are not present in the sea surface temperature component of the record. Urban heat island effects, as increasing evidence suggests, extend to changes in precipitation, clouds and diurnal temperature range, with these detectable as a ‘weekend effect’ owing to lower pollution and other effects during weekends.
Arctic Temperatures Double in 100 Years Average arctic temperatures increased at almost twice the global average rate in the past 100 years. Arctic temperatures have high decadal variability. Note that a slightly longer warm period, almost as warm as the present, that was also observed from the late 1920s to the early 1950s, appears to have had a different spatial distribution than the recent warming.
Lower-Tropospheric Temperatures Lower-tropospheric temperatures have slightly greater warming rates than those at the surface over the period 1958 to 2005.
Lower Stratospheric Temperatures Lower stratospheric temperatures feature cooling since 1979.
Precipitation: Varying Trends Precipitation has generally increased over land north of 30°N over the period 1900 to 2005. However, downward trends dominate the tropics since the 1970s. From 10°N to 30°N, precipitation increased markedly from 1900 to the 1950s, but declined after about 1970. Downward trends are present in the deep tropics from 10°N to 10°S, especially after 1976/1977. Notably, tropical values dominate the global mean. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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It has become significantly wetter in eastern parts of North and South America, northern Europe, and northern and central Asia. On the other side, it has become drier in the Sahel, the Mediterranean, southern Africa and parts of southern Asia. When comparing patterns of precipitation change to those of temperature change, patterns of precipitation change are more spatially and seasonally variable than temperature change. However, where significant precipitation changes do occur, they are consistent with measured changes in stream-flow.
Increased Heavy Precipitation Events Substantial increases in heavy precipitation events are reported in the IPCC report. Increases in the number of heavy precipitation events within many land regions are likely to have taken place, even in those regions where there has been a reduction in total precipitation amount, consistent with a warming climate and observed significant increasing amounts of water vapor in the atmosphere. Increases have also been reported for rarer precipitation events (1 in 50 year return period), but only a few regions have sufficient data to assess such trends reliably.
Droughts More Common Droughts have become more common, especially in the tropics and subtropics, since the 1970s. As pointed out in the Report, observed marked increases in drought in the past three decades arise from more intense and longer droughts over wider areas, as a critical threshold for delineating drought is exceeded over increasingly widespread areas. Important factors that have contributed to more regions experiencing droughts are decreased land precipitation and increased temperatures that enhance evapotranspiration (the combined process of evaporation from the Earth’s surface and transpiration from vegetation) and drying. The regions where droughts have occurred seem to be determined largely by changes in sea surface temperatures, especially in the tropics, through associated changes in the atmospheric circulation and precipitation. In the western USA, diminishing snow pack and subsequent reductions in soil moisture also appear to be factors, while in Australia and Europe, direct links to global warming have been inferred through the extreme nature of high temperatures and heat waves accompanying recent droughts.
Increasing Tropospheric Water Vapor Tropospheric water vapor is increasing. Surface specific humidity has generally increased after 1976 in close association with higher temperatures over both land
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and ocean. Total column water vapor has increased over the global oceans by 1.2 ± 0.3% per decade from 1988 to 2004, consistent in pattern and amount with changes in sea surface temperature and a fairly constant relative humidity. Total column water vapor has increased by 4% since 1970, as suggested by strong correlations with sea surface temperature. Similar upward trends in upper-tropospheric specific humidity have also been detected from 1982 to 2004. These trends considerably enhance the Greenhouse Effect,
Cloud Changes Dominated by ENSO Cloud changes are dominated by the El Niño-Southern Oscillation (ENSO) phenomenon and appear to be opposite over land and ocean (ENSO is an atmosphereocean phenomenon, with preferred time scales of two to about seven years, whereby El Niño is associated with a fluctuation of a global-scale tropical and subtropical surface pressure pattern called the Southern Oscillation, with a great impact on the wind, sea surface temperature and precipitation patterns in the tropical Pacific and climatic effects in many other parts of the world).
Decreases in Continental Diurnal Temperature Widespread (but not ubiquitous) decreases in continental diurnal temperature range since the 1950s coincide with increases in cloud amounts. Radiation changes at the top of the atmosphere from the 1980s to 1990s, possibly related in part to the ENSO phenomenon, appear to be associated with reductions in tropical upper-level cloud cover, and are linked to changes in the energy budget at the surface and changes in observed ocean heat content.
Changes in Atmospheric Circulation Changes in the large-scale atmospheric circulation are apparent. Atmospheric circulation variability and change is largely described by relatively few major patterns. ENSO is the dominant mode of global-scale variability on inter-annual time scales, although there have been times when it is less apparent. The 1976–1977 climate shift, related to the phase change in the Pacific Decadal Oscillation (a key measure of Pacific decadal variability, which is a coupled decadal-to-inter-decadal variability of the atmospheric circulation and underlying ocean in the Pacific Basin) and more frequent El Niños, has affected many areas and most tropical monsoons.
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Mid-Latitude Western Winds Increased Mid-latitude westerly winds (western winds) have generally increased in both hemispheres. These increases in atmospheric circulation are predominantly observed as ‘annular modes’, related to the zonally averaged mid-latitude westerlies, which strengthened in most seasons from the 1960s to at least the mid-1990s, with poleward displacements of corresponding Atlantic and southern polar front jet streams and enhanced storm tracks.
Intense Tropical Cyclone Activity Increased Intense tropical cyclone activity has increased since about 1970. Variations in tropical cyclones, hurricanes and typhoons are dominated by ENSO and decadal variability, which result in a redistribution of tropical storm numbers and their tracks, so that increases in one basin are often compensated by decreases over other oceans. Trends are apparent in sea surface temperatures and other critical variables that influence tropical thunderstorm and tropical storm development. Globally, estimates of the potential destructiveness of hurricanes show a significant upward trend since the mid-1970s, with a trend towards longer lifetimes and greater storm intensity, and such trends are strongly correlated with tropical sea surface temperature. As pointed out in the IPCC Report, these relationships have been reinforced by findings of a large increase in numbers and proportion of hurricanes reaching categories 4 and 5 globally since 1970 even as total number of cyclones and cyclone days decreased slightly in most basins. The largest increase was in the North Pacific, Indian and southwest Pacific Oceans. However, numbers of hurricanes in the North Atlantic have also been above normal (based on 1981–2000 averages) in 9 of the last 11 years, culminating in the record-breaking 2005 season. Moreover, the first recorded tropical cyclone in the South Atlantic occurred in March 2004 off the coast of Brazil.
Temperature Increases Consistent with Observed Changes in the Cryosphere and Oceans The temperature increases are consistent with observed changes in the cryosphere (see below) and oceans. Consistent with observed changes in surface temperature, there has been an almost worldwide reduction in glacier and small ice cap (not including Antarctica and Greenland) mass and extent in the 20th century. Snow cover has decreased in many regions of the Northern Hemisphere, sea ice extents have decreased in the Arctic, particularly in spring and summer, the oceans are warming and sea level is rising.
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Changes in Snow, Ice and Frozen Ground Snow, river and lake ice, sea ice, glaciers and ice caps (dome shaped ice masses, usually covering a highland area), ice shelves (floating slabs of ice of considerable thickness extending from the coast) and ice sheets (mass of land ice sufficiently deep to cover most of the underlying bedrock topography), and frozen ground are the constituents of cryosphere. In terms of the ice mass and its heat capacity, the cryosphere is the second largest component of the climate system (after the ocean). The cryosphere on land stores about 75% of the world’s freshwater. The volumes of the Greenland and Antarctic Ice Sheets are equivalent to approximately 7 m and 57 m of sea level rise, respectively. As pointed out in chapter 4 of the Working Group I Report on the Physical Science Basis of Climate Change, under the title “Observations: Changes in Snow, Ice and Frozen Ground” (Lemke et al., 2007), the cryosphere integrates climate variations over a wide range of time scales, making it a natural sensor of climate variability and providing a visible expression of climate change. This is because, in the climate system, the cryosphere is intricately linked to the surface energy budget, the water cycle, sea level change and the surface gas exchange. Recent decreases in ice mass are correlated with rising surface air temperatures. This is especially true for the region north of 65°N, where temperatures have increased by about twice the global average from 1965 to 2005. According to the Report, evidence concerning the cryosphere, include the following, with the uncertainty range denoting the 5 to 95% confidence interval:
Snow Cover Decreased Snow cover has decreased in most regions, especially in spring and summer. In the Northern Hemisphere (NH), snow cover observed by satellite over the 1966 to 2005 period decreased in every month except November and December, with a stepwise drop of 5% in the annual mean in the late 1980s. In the Southern Hemisphere, the few long records or proxies mostly show either decreases or no changes in the past 40 years or more. Where snow cover or snow-pack decreased, temperature often dominated, while where snow increased, precipitation almost always dominated.
Freeze-Up and Breakup Dates for River and Lake Ice Exhibit Spatial Variability Averaged over available data for the NH spanning the past 150 years, freeze-up date has occurred later at a rate of 5.8 ± 1.6 days per century, while the breakup
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date has occurred earlier at a rate of 6.5 ± 1.2 days per century. Some regions show trends of opposite sign.
Decline in Annual Mean Arctic Sea Ice A continuation of the 2.7 ± 0.6% per decade decline in annual mean arctic sea ice extent since 1978 is indicated by Satellite data. The decline for summer extent is larger than for winter, with the summer minimum declining at a rate of 7.4 ± 2.4% per decade since 1979. Other data indicate that the summer decline began around 1970. Similar observations in the Antarctic reveal larger inter-annual variability but no consistent trends.
Average Sea Ice Thickness in Central Arctic Very Likely Decreased The average sea ice thickness in the central Arctic has very likely decreased by up to 1 m from 1987 to 1997, as indicated by submarine-derived data for the central Arctic. Model-based reconstructions support this finding, suggesting an arctic-wide reduction of 0.6 to 0.9 m over the same period. Large-scale trends prior to 1987 are ambiguous. Mass loss of glaciers and ice caps is estimated to be 0.50 ± 0.18 mm per year in sea level equivalent (SLE) between 1961 and 2004, and 0.77 ± 0.22 mm per year SLE between 1991 and 2004. It is likely that the late 20th-century glacier wastage has been a response to post-1970 warming. Strongest mass losses per unit area have been observed in Patagonia, Alaska and northwest USA and southwest Canada. Because of the corresponding large areas, the biggest contributions to sea level rise came from Alaska, the Arctic and the Asian high mountains.
Ice Sheets in Greenland and Antarctica Contribute to Sea Level Rise It is very likely that the ice sheets in Greenland and Antarctica, taken together, have been contributing to sea level rise over 1993 to 2003. Thickening in central regions of Greenland has been more than offset by increased melting near the coast. Flow speed has increased for some Greenland and Antarctic outlet glaciers, which drain ice from the interior. The corresponding increased ice sheet mass loss has often followed thinning, reduction or loss of ice shelves or loss of floating glacier tongues. According to estimates, a mass balance of the Greenland Ice Sheet of between +25 and –60 Gt per year (–0.07 to 0.17 mm per year SLE) from 1961 to 2003, and –50 to –100 Gt per year (0.14 to 0.28 mm per year SLE) from 1993 to 2003, with even larger losses in 2005 is suggested. Regarding the Antarctic Ice Sheet, estimates for Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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the overall mass balance range from +100 to –200 Gt per year (–0.28 to 0.55mm per year SLE) for 1961 to 2003, and from +50 to –200 Gt per year (–0.14 to 0.55 mm per year SLE) for 1993 to 2003. The recent changes in ice flow are likely to be sufficient to explain much or the entire estimated antarctic mass imbalance, with changes in ice flow, snowfall and melt water runoff sufficient to explain the mass imbalance of Greenland.
Temperature at Top of Permafrost Layer Significantly Increased The temperature at the top of the permafrost layer has increased by up to 3°C since the 1980s in the Arctic (permafrost is ground that remains at or below 0°C for at least two consecutive years). The permafrost base has been thawing at a rate ranging up to 0.04 m per year in Alaska since 1992 and 0.02 m per year on the Tibetan Plateau since the 1960s. Permafrost degradation is leading to changes in land surface characteristics and drainage systems.
Maximum Extent of Seasonally Frozen Ground Decreased The maximum extent of seasonally frozen ground has decreased by about 7% in the NH from 1901 to 2002, with a decrease in spring of up to 15%. Its maximum depth has decreased about 0.3 m in Eurasia since the mid-20th century. In addition, maximum seasonal thaw depth over permafrost has increased about 0.2 m in the Russian Arctic from 1956 to 1990. Earlier growing season but no change in duration have been caused by onset dates of thaw in spring and freeze in autumn that have advanced five to seven days in Eurasia from 1988 to 2002. The above results indicate that the total cryospheric contribution to sea level change ranged from 0.2 to 1.2 mm per year between 1961 and 2003, and from 0.8 to 1.6 mm per year between 1993 and 2003. The rate increased over the 1993 to 2003 period primarily due to increasing losses from mountain glaciers and ice caps, from increasing surface melt on the Greenland Ice Sheet and from faster flow of parts of the Greenland and Antarctic Ice Sheets. Estimates of changes in the ice sheets are highly uncertain, and no best estimates are given for their mass losses or gains. However, strictly for the purpose of considering the possible contributions to the sea level budget, a total cryospheric contribution of 1.2 ± 0.4 mm per year SLE is estimated for 1993 to 2003 assuming a midpoint mean plus or minus uncertainties and Gaussian error summation.
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Oceanic Climate Change and Sea Level As pointed out in chapter 5 of the Working Group I Report on the Physical Science Basis of Climate change, under the title “Observations: Oceanic Climate change and Sea Level” (Bindoff et al., 2007), the large amount of heat, which has been mainly stored in the upper layers of the ocean, plays a crucial role in climate change. Indeed, the ocean’s heat capacity is about 1,000 times larger than that of the atmosphere, and the oceans net heat uptake since 1960 is around 20 times greater than that of the atmosphere. The transport of heat and freshwater by ocean currents can have an important effect on regional climates, while the large-scale Meridional Overturning Circulation (a term referring to the overturning circulation in the ocean quantified by east-west sums of mass transports in depth or density layers) influences the climate on a global scale (Vellinga & Wood, 2002). Oceanic parameters can be useful for detecting climate change, in particular temperature and salinity changes in the deeper layers and in different regions. Furthermore, changes in the storage of heat and in the distribution of ocean salinity cause the ocean to expand or contract and hence change the sea level both regionally and globally. The main conclusions of the Report regarding oceanic climate and sea level changes are the following:
Oceans Warming Over the period 1961 to 2003, global ocean temperature has risen by 0.10°C from the surface to a depth of 700 m. Global ocean heat content (0–3,000 m) has increased during the same period to an extent equivalent to absorbing energy at a rate of 0.21 ± 0.04 W per m2 globally averaged over the Earth’s surface. Global ocean heat content observations show considerable inter-annual and inter-decadal variability superimposed on the longer-term trend. Notably, the period 1993 to 2003 has high rates of warming relative to 1961 to 2003, but since 2003 there has been some cooling.
Salinity Trends Large-scale, coherent trends of salinity are observed from 1955 to 1998. They are characterised by a global freshening in sub-polar latitudes and a salinification of shallower parts of the tropical and subtropical oceans. Freshening is pronounced in the Pacific while increasing salinities prevail over most of Atlantic and Indian Oceans. These trends are consistent with changes in precipitation and inferred larger water transport in the atmosphere from low latitudes to high latitudes and from the Atlantic to the Pacific. Observations do not allow for a reliable estimate of the global average change in salinity in the oceans. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Oceanic Water Masses Changing Key oceanic water masses are changing; however, there is no clear evidence for ocean circulation changes.
Ocean Biogeochemistry Changing The total inorganic carbon content of the oceans has increased by 118 ± 19 GtC between the end of the pre-industrial period (about 1750) and 1994 and continues to increase. It is more likely than not that the fraction of emitted carbon dioxide that was taken up by the oceans has decreased from 42 ± 7% during 1750 to 1994 to 37 ± 7% during 1980 to 2005.
Global Mean Sea Level Rising From 1961 to 2003, the average rate of sea level rise was 1.8 ± 0.5 mm per year. For the 20th century, the average rate was 1.7 ± 0.5 mm per year. There is high confidence that the rate of sea level rise has increased between the mid-19th and the mid-20th centuries. While this refers to global mean values, sea level change is highly non-uniform spatially. In some regions, rates are up to several times the global mean rise, while in other regions sea level is falling. There is evidence for an increase in the occurrence of extreme high water worldwide related to storm surges, and variations in extremes during this period are related to the rise in mean sea level and variations in regional climate.
Decadal Variability of Sea Level The rise in global mean sea level is accompanied by considerable decadal variability. For the period 1993 to 2003, the rate of sea level rise is estimated as 3.1 ± 0.7 mm per year, significantly higher than the average rate. Similar large rates have occurred in previous 10-year periods since 1950. It is unknown whether the higher rate in 1993 to 2003 is due to decadal variability or an increase in the longer-term trend.
Improved Understanding of Contributions to Sea Level Change While there are uncertainties in the estimates of the contributions to sea level change, understanding has significantly improved for recent periods. For the period 1961 to 2003, the average contribution of thermal expansion to sea level rise was 0.4 ± 0.1 mm per year. For the period 1993 to 2003, for which the observing system is much better, the contributions from thermal expansion (1.6 ± 0.5 mm per year) and loss Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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of mass from glaciers, ice caps and the Greenland and Antarctic Ice Sheets together give 2.8 ± 0.7 mm per year. For the latter period, the climate contributions constitute the main factors in the sea level budget, which is closed to within known errors.
Consistency of Observations The patterns of observed changes described above regarding global ocean heat content and salinity, sea level, thermal expansion, water mass evolution and biogeochemical parameters are broadly consistent with the observed ocean surface changes and the known characteristics of the large-scale ocean circulation.
CLIMATE CHANGE EVOLUTION, CLIMATE MODELS AND THE SRES SCENARIOS The credibility of the estimates of the IPCC reports regarding climate change evolution is dependent on the confidence that may be placed on these estimates, based on the scientific evidence supporting them. It is therefore important to specify the extent to which these reports are trustful as several climate scenarios have been developed by the scientific community and used by IPCC in its assessment reports. According to the Annex I (Glossary) of the Report, a climate scenario is a plausible and often simplified representation of the future climate, based on an internally consistent set of climatological relationships that has been constructed for explicit use in investigating the potential consequences of anthropogenic climate change, often serving as input to impact models. A climate scenario is distinguished from a climate projection, which often serves as the raw material for constructing climate scenarios, but climate scenarios usually require additional information such as about the observed current climate. A climate projection is defined as a projection of the response of the climate system to emission or concentration scenarios of GHGs and aerosols, or RF scenarios, often based upon simulations by climate models. Climate projections are distinguished from climate predictions in order to emphasize that climate projections depend upon the emission/concentration/ RF scenario used. The latter are based on assumptions concerning, for example, future socioeconomic and technological developments that may or may not be realized and are therefore subject to substantial uncertainty. Chapter 8 of the Working Group I Report on the Physical Science Basis of Climate Change, under the title “Climate Models and Their Evaluation” (Randall et
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al., 2007), assesses the capacity of the global climate models used in the Report for projecting future climate change. Confidence in model estimates of future climate evolution has been enhanced via a range of advances since the previous (3rd) IPCC Assessment Report. Climate models are based on well-established physical principles and have been demonstrated to reproduce observed features of recent climate and past climate changes. Confidence in quantitative estimates of future climate change, particularly at continental and larger scales, is higher for some climate variables (e.g. temperature) than for others (e.g. precipitation). Progress since the IPCC 3rd Assessment Report includes, among others: • • • •
• •
enhanced scrutiny of models and expanded diagnostic analysis of model behaviour more comprehensive tests of climate models including, for example, evaluations of forecasts on time scales from days to a year better understanding of the inter-model differences in equilibrium climate sensitivity improvements to resolution, computational methods and parametrizations, while additional processes (e.g. interactive aerosols) have been included in more of the climate models increased overall confidence in the models’ representation of important climate processes improved ability to simulate extreme events, etc.
Thus there have been significant developments in model formulation, model climate simulation, analysis methods, and the evaluation of climate feedbacks. The analysis of processes contributing to climate feedbacks in models and recent studies based on large ensembles of models suggest that in the future it may be possible to use observations to narrow the current spread in model projections of climate change. One of the most important contributions of IPCC reports is their role in raising awareness for future climate change. This is greatly facilitated by climate change projections, which summarize and extend present knowledge about climate and the impacts of GHG emissions on climate into the future. Future GHG emissions will be the product of very complex dynamic systems, determined by driving forces such as demographic and socio-economic developments and technological change. The Report has made use of the global climate models in order to project future climate change. These models have reproduced the results, which are the subject of chapter 10 of the Working Group I Report on the Physical Science Basis of Climate Change, under the title “Global Climate Projections” (Meehl et al., 2007). In particular these results are based on a hierarchy of models, ranging from Atmosphere-Ocean General Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Circulation Models (AOGCMs) and Earth System Models of Intermediate Complexity (EMICs) to Simple Climate Models (SCMs). The climate projections shown in chapter 10 of the Report are based on the so-called SRES scenarios developed by Nakićenović and Swart (2000). The SRES scenarios represent the range of driving forces and emissions so as to reflect current understanding and knowledge about underlying uncertainties. They exclude only outlying “surprise” or “disaster” scenarios in the literature. The scenarios do not include additional climate initiatives, which means that no scenarios are included that explicitly assume implementation of the United Nations Framework Convention on Climate change (UNFCCC) or the emissions targets of the Kyoto Protocol. However, GHG emissions are directly affected by non-climate change policies designed for a wide range of other purposes. In particular, the SRES scenario set includes four scenario families, A1, A2, B1 and B2 (IPCC Special Report Emissions Scenarios, 2000). Scenario families are scenarios that have a similar demographic, societal, economic and technical change storyline. The four scenario families are the following.
The A1 Storyline and Scenario Family It describes a future world of very rapid economic growth, global population that peaks in mid-century and declines thereafter, and the rapid introduction of new and more efficient technologies. Major underlying themes are convergence among regions, capacity building, and increased cultural and social interactions, with a substantial reduction in regional differences in per capita income. The A1 scenario family develops into three groups that describe alternative directions of technological change in the energy system. The three A1 groups are distinguished by their technological emphasis: fossil intensive (A1FI), non-fossil energy sources (A1T), or a balance across all sources (A1B) (balanced is defined as not relying too heavily on one particular energy source, on the assumption that similar improvement rates apply to all energy supply and end use technologies).
The A2 Storyline and Scenario Family It describes a very heterogeneous world. The underlying theme is self-reliance and preservation of local identities. Fertility patterns across regions converge very slowly, which results in continuously increasing global population. Economic development is primarily regionally oriented and per capita economic growth and technological change are more fragmented and slower than in other storylines.
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The B1 Storyline and Scenario Family It describes a convergent world with the same global population that peaks in midcentury and declines thereafter, as in the A1 storyline, but with rapid changes in economic structures toward a service and information economy, with reductions in material intensity, and the introduction of clean and resource-efficient technologies. The emphasis is on global solutions to economic, social, and environmental sustainability, including improved equity, but without additional climate initiatives.
The B2 Storyline and Scenario Family It describes a world in which the emphasis is on local solutions to economic, social, and environmental sustainability. It is a world with continuously increasing global population at a rate lower than A2, intermediate levels of economic development, and less rapid and more diverse technological change than in the B1 and A1 storylines. While the scenario is also oriented toward environmental protection and social equity, it focuses on local and regional levels. The models are forced with concentrations of GHGs and other constituents derived from various emissions scenarios ranging from non-mitigation scenarios to idealized long-term scenarios. Non-mitigated projections of future climate change at scales from global to hundreds of kilometers are assessed, while further assessments of regional and local climate changes are provided in chapter 11 of the Working Group I Report on the Physical Science Basis of Climate Change under the title “Regional Climate Projections” (Christensen et al., 2007). Projections are based on multi-model means, differences between models can be assessed quantitatively and in some instances, estimates of the probability of change of important climate system parameters complement expert judgment. Continued GHG emissions at or above current rates will cause further warming and induce many changes in the global climate system during the 21st century that would very likely be larger than those observed during the 20th century. In particular, according to the Report:
Continuing Increases in Global Mean Surface Air Temperature All models assessed, for all the non-mitigation scenarios considered, project increases in global mean surface air temperature is continuing over the 21st century, driven mainly by increases in anthropogenic GHG concentrations, with the warming proportional to the associated RF.
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Heat Waves More Intense and Frequent and Longer Lasting, Decreasing Cold Episodes It is very likely that heat waves will be more intense, more frequent and longer lasting in a future warmer climate. Cold episodes are projected to decrease significantly in a future warmer climate. Almost everywhere, daily minimum temperatures are projected to increase faster than daily maximum temperatures, leading to a decrease in diurnal temperature range. Decreases in frost days are projected to occur almost everywhere in the middle and high latitudes, with a comparable increase in growing season length.
Varying Precipitation Trends Precipitation will generally increase in the areas of regional tropical precipitation maxima (such as the monsoon regimes) and over the tropical Pacific in particular, with general decreases in the subtropics, and increases at high latitudes as a consequence of a general intensification of the global hydrological cycle. Globally averaged mean water vapor, evaporation and precipitation are projected to increase.
Increased Intensity of Precipitation Events Intensity of precipitation events is projected to increase, particularly in tropical and high latitude areas that experience increases in mean precipitation. Even in areas where mean precipitation decreases (most subtropical and mid-latitude regions), precipitation intensity is projected to increase but there would be longer periods between rainfall events. There is a tendency for drying of the mid-continental areas during summer, indicating a greater risk of droughts in those regions. Precipitation extremes increase more than does the mean in most tropical and mid- and highlatitude areas.
Decreasing Snow Cover and Sea Ice Extent, Glaciers and Ice Caps Losing Mass Snow cover and sea ice extent will decrease, while glaciers and ice caps will lose mass owing to a dominance of summer melting over winter precipitation increases. This will contribute to sea level rise. There is a projected reduction of sea ice in the 21st century in both the Arctic and Antarctic with a rather large range of model responses. The projected reduction is accelerated in the Arctic, where some models project summer sea ice cover to disappear entirely in the high-emission A2 scenario in the latter part of the 21st century. Widespread increases in thaw depth over much Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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of the permafrost regions are projected to occur in response to warming over the next century.
Reduced Efficiency of Earth System to Absorb Anthropogenic CO2 Future climate change will reduce the efficiency of the Earth system (land and ocean) to absorb anthropogenic CO2. As a result, an increasingly large fraction of anthropogenic CO2 will stay airborne in the atmosphere under a warmer climate. For the A2 emission scenario, this positive feedback will lead to additional atmospheric CO2 concentration varying between 20 and 220 ppm among the models by 2100. Atmospheric CO2 concentrations will range between 730 and 1,020 ppm by 2100.
Increasing Acidification of Surface Ocean Increasing atmospheric CO2 concentrations lead directly to increasing acidification (i.e. decrease in the pH due to the uptake of CO2) of the surface ocean. Multi-model projections based on SRES scenarios give reductions in pH of between 0.14 and 0.35 units in the 21st century, adding to the present decrease of 0.1 units from preindustrial times. Low-latitude regions and the deep ocean will be affected as well.
Sea Level Rise Sea level is projected to rise between the two last decades of the previous (1980–1999) and the end of this century (2090–2099) to varying degrees under the different SRES scenarios (under the B1 scenario by 0.18 to 0.38 m, B2 by 0.20 to 0.43 m, A1B by 0.21 to 0.48 m, A1T by 0.20 to 0.45 m, A2 by 0.23 to 0.51 m, and A1FI by 0.26 to 0.59 m).
Weak Shift of Mean Tropical Pacific Climate Regarding the mean Tropical Pacific Climate change, there is a weak shift towards average background conditions which may be described as ‘El Niñolike’, with sea surface temperatures in the central and east equatorial Pacific warming more than those in the west, weakened tropical circulations and an eastward shift in mean precipitation.
ENSO Inter-Annual Variability will Continue El Niño-Southern Oscillation (ENSO) inter-annual variability will continue in the future no matter what the change in average background conditions. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Varying Trends in Precipitation An increase in precipitation is projected in the Asian monsoon (along with an increase in inter-annual season-averaged precipitation variability) and the southern part of the west African monsoon with some decrease in the Sahel in northern summer, as well as an increase in the Australian monsoon in southern summer in a warmer climate. The monsoonal precipitation in Mexico and Central America is projected to decrease in association with increasing precipitation over the eastern equatorial Pacific.
Sea Level Pressure Increasing Sea level pressure is projected to increase over the subtropics and mid-latitudes, and decrease over high latitudes.
Peak Wind Intensities Increasing, Frequency of Tropical Storms Decreasing A likely increase of peak wind intensities and notably, where analyzed, increased near-storm precipitation in future tropical cyclones is projected. Tropical storm frequency shows a decrease in the overall number of storms.
Fewer Mid-Latitude Storms Fewer mid-latitude storms averaged over each hemisphere are projected, associated with the pole-ward shift of the storm tracks that is particularly notable in the Southern Hemisphere, with lower central pressures for these pole-ward shifted storms. The increased wind speeds result in more extreme wave heights in those regions.
Further Warming of 0.5°C should GHGs were Stabilized If GHGs were stabilized, then a further warming of 0.5°C would occur. This should not be confused with ‘unavoidable climate change’ over the next half century, which would be greater because forcing cannot be instantly stabilized.
Greenland Ice Sheet Largely Eliminated The Greenland Ice Sheet is projected to contribute to sea level after 2100, initially at a rate of 0.03 to 0.21 m per century for stabilization in 2100 at A1B concentrations. The contribution would be greater if dynamical processes omitted from current Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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models increased the rate of ice flow, as has been observed in recent years. Except for remnant glaciers in the mountains, the Greenland Ice Sheet would largely be eliminated. The result would be a sea level rise by about 7 m, if a sufficiently warm climate were maintained for millennia, while this would happen more rapidly if ice flow accelerated. Models suggest that the global warming required lies in the range 1.9°C to 4.6°C relative to the pre-industrial temperature. Even if temperatures were to decrease later, it is possible that the reduction of the ice sheet to a much smaller extent would be irreversible.
Antarctic Ice Sheet Contribution to Sea Level Rise Negative for Coming Centuries The Antarctic Ice Sheet is projected to remain too cold for widespread surface melting, and to receive increased snowfall, leading to a gain of ice. Loss of ice from the ice sheet could occur through increased ice discharge into the ocean following weakening of ice shelves by melting at the base or on the surface. In current models, the net projected contribution to sea level rise is negative for coming centuries, but it is possible that acceleration of ice discharge could become dominant, causing a net positive contribution.
PALAEOCLIMATE As said in the Introduction of this chapter, in addition to the above, the Report makes also reference to some other subjects including Palaeoclimate, i.e.climate during periods prior to the development of measuring instruments, including historic and geologic time, for which only proxy climate records are available. Thus, in chapter 6 of the Working Group I Report on the Physical Science Basis of Climate Change, which is devoted to this subject (Jansen et al., 2007), the Report gives answers to a set of questions. Among others, addressing the question “What is the relationship between past GHG concentrations and climate?” the Report points out that the sustained rate of increase over the past century in the combined RF from the three main GHGs (carbon dioxide, methane, and nitrous oxide) is very likely unprecedented in at least the past 16,000 years. Pre-industrial variations of atmospheric GHG concentrations observed during the last 10,000 years were small compared to industrial era GHG increases, and were likely mostly due to natural processes. Also, the Report points out that it is very likely that the current atmospheric concentrations of CO2 (379 ppm) and CH4 (1,774 ppb) exceed by far the natural range of the last 650,000 years. Ice core data indicate that CO2 varied within a range of 180 to 300 ppm and CH4 within 320 to 790 ppb over this period. Over the same period, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Antarctic temperature and CO2 concentrations co-vary, indicating a close relationship between climate and the carbon cycle. On the other hand, it is very likely that glacial-interglacial CO2 variations have strongly amplified climate variations, but it is unlikely that CO2 variations have triggered the end of glacial periods. Another interesting question addressed by the Report in chapter 6 is “How does the 20th-century climate change compare with the climate of the past 2,000 years?”. The Report points out that it is very likely that the average rates of increase in CO2, as well as in the combined RF from CO2, CH4 and N2O concentration increases, have been at least five times faster over the period from 1960 to 1999 than over any other 40-year period during the past two millennia prior to the industrial era. Ice core data from Greenland and Northern Hemisphere mid-latitudes show a very likely rapid post-industrial era increase in sulphate concentrations above the preindustrial background. Additionally, while the Third Assessment Report pointed to the exceptional warmth of the late 20th century, relative to the past 1,000 years, subsequent evidence has strengthened this conclusion. It is very likely that average Northern Hemisphere temperatures during the second half of the 20th century were higher than for any other 50-year period in the last 500 years. It is also likely that this 50-year period was the warmest Northern Hemisphere period in the last 1,300 years, and that this warmth was more widespread than during any other 50-year period in the last 1,300 years. These conclusions are most robust for summer in extra-tropical land areas, and for more recent periods because of poor early data coverage. Finally, according to the Report, the rise in surface temperatures since 1950 very likely cannot be reproduced without including anthropogenic GHGs in the model forcings, and it is very unlikely that this warming was merely a recovery from a pre-20th century cold period.
DISCUSSION AND CONCLUSION The basic facts of global climate warming have been summarized in this chapter based almost exclusively on the Fourth Assessment Report of Working Group I of UN’s Intergovernmental Panel on Climate Change. These facts refer to changes due to global warming, in atmospheric constituents and in RF, in surface and atmospheric climate change, in changes in snow, ice and frozen ground and in oceanic climate change and sea level. There is no doubt that the findings of the above Report appearing in this chapter are not arbitrary. They are all well documented, based on the most recent scientific research available. Particular care has been taken in the Report, so that the findings be characterised by a corresponding degree of confidence, expressed qualitatively by the terms “likely” or “very likely”. Findings that are not certain enough are eiCopyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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ther characterized as such or are ignored. Thus, decision makers are disposed of a concrete ground of knowledge about facts as well as of forecasts about the evolution of our planet in future decades and even centuries, on which they may rely in order to work out policies and formulate decisions. In order to summarize and further explicate the existing knowledge, the Working Group I Report devotes one chapter (chapter 9) on the subject of understanding and attributing climate change (Hegerl et al., 2007). The arguments are focused mainly on ascertaining that warming of the climate system is human-induced. In particular, in chapter 9 of the Report (Hegerl et al., 2007), among others, the following are summarized: •
•
•
Human-induced warming of the climate system is widespread. Anthropogenic warming of the climate system can be detected in temperature observations taken at the surface, in the troposphere and in the oceans. GHG forcing has very likely caused most of the observed global warming over the last 50 years. The observed pattern of tropospheric warming and stratospheric cooling is very likely due to the influence of anthropogenic forcing, particularly GHGs and stratospheric ozone depletion. Regarding anthropogenic forcing, it is likely that it has contributed to the general warming observed in the upper several hundred meters of the ocean during the latter half of the 20th century. Anthropogenic forcing, results in thermal expansion from ocean warming and glacier mass loss. It has very likely contributed to sea level rise during the latter half of the 20th century. It is likely that there has been a substantial anthropogenic contribution to surface temperature increases in every continent except Antarctica since the middle of the 20th century. Anthropogenic influence has been detected in every continent except Antarctica (which has insufficient observational coverage to make an assessment), and in some sub-continental land areas. No climate model that has used natural forcing only (i.e. zero anthropogenic contribution) has reproduced the observed global mean warming trend or the continental mean warming trends in all individual continents except Antarctica over the second half of the 20th century. Surface temperature extremes have likely been affected by anthropogenic forcing. Many indicators of climate extremes and variability, including the annual numbers of frost days, warm and cold days, and warm and cold nights, show changes that are consistent with warming. An anthropogenic influence has been detected in some of these indices, and there is evidence that anthropogenic forcing may have substantially increased the risk of extremely warm summer conditions regionally, such as the 2003 European heat wave.
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•
•
•
Anthropogenic forcing has likely contributed to recent decreases in arctic sea ice extent and to glacier retreat. The observed decrease in global snow cover extent and the widespread retreat of glaciers are consistent with warming, and there is evidence that this melting has likely contributed to sea level rise. Trends over recent decades in the Northern and Southern Annular Modes, which correspond to sea level pressure reductions over the poles, are likely related in part to human activity, affecting storm tracks, winds and temperature patterns in both hemispheres. The response to volcanic forcing simulated by some models is detectable in global annual mean land precipitation during the latter half of the 20th century. The latitudinal pattern of change in land precipitation and observed increases in heavy precipitation over the 20th century appear to be consistent with the anticipated response to anthropogenic forcing. It is more likely than not that anthropogenic influence has contributed to increases in the frequency of the most intense tropical cyclones. Many observed changes in surface and free atmospheric temperature, ocean temperature and sea ice extent, and some large-scale changes in the atmospheric circulation over the 20th century are distinct from internal variability and consistent with the expected response to anthropogenic forcing. The simultaneous increase in energy content of all the major components of the climate system as well as the magnitude and pattern of warming within and across the different components supports the conclusion that the cause of the warming is extremely unlikely (<5%) to be the result of internal processes. Qualitative consistency is also apparent in some other observations, including snow cover, glacier retreat and heavy precipitation.
Despite the above, based on concrete scientific observations, uncertainties remain, according to the Report. Thus, uncertainties in records still affect confidence in estimates of the anthropogenic contribution to tropospheric temperature change. In conclusion, understanding changes in the intensity, frequency and risk of extremes has improved, despite incomplete global data sets and remaining model uncertainties, which still restrict understanding of changes in extremes and attribution of changes to causes. The basic facts about global warming show that the Earth is passing through a long period of radical change. These facts will continue and even get more intense in the future. They already affect and will continue to affect very seriously all the most important aspects of life and the environment on our planet. What is probably most important, if not frightening, is the answer to the question “if emissions of GHGs are reduced, how quickly do their concentrations in the atmosphere decrease?”. As explained in the Report (pp. 125-126), the adjustment of GHG concentrations in Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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the atmosphere to reductions in emissions depends on the chemical and physical processes that remove each gas from the atmosphere. Concentrations of some GHGs decrease almost immediately in response to emission reduction, while others can actually continue to increase for centuries even with reduced emissions. Thus, the most important GHG, carbon dioxide, is exchanged between the atmosphere, the ocean and the land through processes such as atmosphere-ocean gas transfer and chemical (e.g. weathering) and biological (e.g. photosynthesis) processes. While more than half of the CO2 emitted is currently removed from the atmosphere within a century, some fraction (about 20%) of emitted CO2 remains in the atmosphere for many millennia. Because of slow removal processes, atmospheric CO2 will continue to increase in the long term even if its emission is substantially reduced from present levels. This chapter, as noted, aimed at presenting the basic facts of global warming and, for this purpose, has been almost exclusively based on the UN’s Intergovernmental Panel on Climate Change Report, particularly on Working Group I’s Fourth Assessment Report on the Physical Science Basis of Climate Change. The Report in turn has documented its findings based on the latest available results of scientific research. Among these findings are issues that have not been addressed in this chapter, for example, issues referring to couplings between changes in the climate system and biogeochemistry (Denman et al., 2007), which however are more technical and less close to the subject of this book. In the next chapter, it will be shown how global warming is affecting Earth and its economies and societies in particular.
REFERENCES Bindoff, N. L., Willebrand, J., Artale, V., & Cazenave, A. Gregory, J., Gulev, S., Hanawa, K., Le Quéré, C., Levitus, S., Nojiri, Y., Shum, C. K., Talley, L.D., & Unnikrishnan, A. (2007). Observations: Oceanic Climate Change and Sea Level. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor & H. L. Miller (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Christensen, J. H., Hewitson, B., Busuioc, A., Chen, A., Gao, X., & Held, I. (2007). Regional Climate Projections. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press.
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Denman, K. L., Brasseur, G., Chidthaisong, A., Ciais, P., Cox, P. M., & Dickinson, R. E. (2007). Couplings Between Changes in the Climate System and Biogeochemistry. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Forster, P., Ramaswamy, V., Artaxo, P., Berntsen, T., Betts, R., & Fahey, D. W. (2007). Changes in Atmospheric Constituents and in Radiative Forcing. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Hegerl, G. C., Zwiers, F. W., Braconnot, P., Gillett, N. P., Luo, Y., & Marengo Orsini, J. A. (2007). Understanding and Attributing Climate Change. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf IPCC. (2007a). Climate change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor & H. L. Miller (Eds.), Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg1_report_the_physical_science_basis.htm IPCC. (2007b). Climate change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Frequently Asked Questions. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor & H. L. Miller (Eds.), Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Retrieved February 13, 2009, from http://www.ipcc.ch/pdf/assessment-report/ ar4/wg1/ar4-wg1-faqs.pdf
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Jansen, E., Overpeck, J., Briffa, K. R., Duplessy, J.-C., Joos, F., & Masson-Delmotte, V. (2007). Palaeoclimate. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Lemke, P., Ren, J., Alley, R. B., Allison, I., Carrasco, J., Flato, G., et al. Mote, P., Thomas, R. H., & Zhang, T. (2007). Observations: Changes in Snow, Ice and Frozen Ground. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor & H. L. Miller (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Meehl, G. A., Stocker, T. F., Collins, W. D., Friedlingstein, P., Gaye, A. T., & Gregory, J. M. (2007). Global Climate Projections. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Nakićenović, N., & Swart, R. (Eds.). (2000). Special Report on Emissions Scenarios. A Special Report of Working Group III of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Randall, D. A., Wood, R. A., Bony, S., Colman, R., Fichefet, T., & Fyfe, J. (2007). Climate Models and Their Evaluation. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Special Report Emissions Scenarios, I. P. C. C. (2000). Summary for Policymakers, Emissions Scenarios. A Special Report of Working Group III of the Intergovernmental Panel on Climate Change, based on a draft prepared by: N. Nakicenovic, O. Davidson, G. Davis, A. Grübler, T. Kram, E. L. La Rovere, B. Metz, T. Morita, W. Pepper, H. Pitcher, A. Sankovski, P. Shukla, R. Swart, R. Watson, & Z. Dadi. Retrieved November 19, 2008, from http://www.ipcc.ch/pdf/special-reports/spm/ sres-en.pdf Trenberth, K. E. (1990). Recent observed interdecadal climate changes in the Northern Hemisphere. Bulletin of the American Meteorological Society, 71, 988–993. doi:10.1175/1520-0477(1990)071<0988:ROICCI>2.0.CO;2
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Trenberth, K. E., Jones, P. D., Ambenje, P., Bojariu, R., Easterling, D., & Klein Tank, A. (2007). Observations: Surface and Atmospheric Climate change. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Vellinga, M., & Wood, R. A. (2002). Global climatic impacts of a collapse of the Atlantic thermohaline circulation. Climatic Change, 54, 251–267. doi:10.1023/A:1016168827653
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Chapter 3
Global Impacts of Climate Change
INTRODUCTION In the previous chapter, the basic facts regarding global warming have been presented, summarizing mainly the latest scientific findings reported by the UN’s Intergovernmental Panel on Climate Change (IPCC), particularly in Working Group I’s Fourth Assessment Report on the Physical Science Basis of Climate Change (Forster et al., 2007). Given these facts, the question is which are and will be their impacts on our planet, particularly on people’s lives, the environment and the prospects for growth and development in different parts of the world. Are and will these effects be felt evenly across the globe? Which parts of the world are and will be suffering most? In which countries growth is and will be affected more adversely? What are and will DOI: 10.4018/978-1-61692-800-1.ch003 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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be the economic implications of climate change and how people’s everyday lives will be affected, for example in terms of income, per capita consumption or access to food or water? How and to what extent the environment is and will be affected and how do and will the ecosystems react to climate change? These questions are not of theoretical value only. They have to do with the most basic practical needs and expectations of human societies. They also have to do with the future of the natural environment as we have known it, the ecosystems comprising it and our planet as a whole. The basic facts regarding global warming are alarming. So is the analysis of the impacts of the new reality regarding climate and its evolution on the society, economy and environment. As an example, based on epidemiological studies on various diseases associated with the change in temperature, humidity and precipitation in arid and hot regions, empirical models that have been developed to assess human health risk in the Gulf region to predict elevated levels of diseases and mortality rates under different emission scenarios, as developed by the IPCC, indicate increased mortality rates due to cardiovascular and respiratory illnesses, thermal stress, and increased frequency of infectious vector borne diseases (diseases in which the pathogenic microorganism is transmitted from an infected individual to another individual by an arthropoid or other agent, sometimes with other animals serving as intermediary hosts) in the region between 2070 and 2099 (Husain & Chaudhary, 2008). Another example connects climate change and agriculture and food supply (EPA, 2009). Several factors directly connect the former with the latter. Thus, while an increase in average temperature, can lengthen the growing season in regions with a relatively cool spring and fall, it can adversely affect crops in regions where summer heat already limits production. Also it can increase soil evaporation rates and the chances of severe droughts. Changes in rainfall can affect soil erosion rates and soil moisture, both of which are important for crop yields. Increasing atmospheric CO2 levels can act as a fertilizer and enhance crop growth, which, however may be tempered by other impacts of climate change (e.g., temperature and precipitation changes). Higher levels of ground level ozone, shaped by both emissions and temperature, limit the growth of crops. Finally, changes in the frequency and severity of heat waves, drought, floods and hurricanes, which are anticipated by global climate models but are more difficult to forecast, may also affect adversely agriculture. This chapter aims to treat the issue of the global impacts of climate change by presenting answers to questions such as those posed above. In the following sections, the largest, most widely known and discussed and most influential of the reports assessing the impacts of climate change on economy and society so far, namely the Stern Review on the Economics of Climate Change (the Stern Review in the sequel), is introduced. Subsequent sections have drawn their points and arguments mainly from this Review. More specifically, the impacts on people as the globe Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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warms, particularly the question of how climate change will affect people around the world, including the potential implications for access to food, water stress, health and well-being, and the environment are explored. Then the implications of climate change for developing as well as for developed countries are considered. It is pointed out that developing countries are more vulnerable to climate change in respect to developed countries. Furthermore, some regions in developed countries will benefit from temperature rises of up to 1 to 2°C, but the balance of impacts will become increasingly negative as temperature rises. The monetary costs of climate change are also presented, their estimation being based on existing modelling work. In the final section some issues that emerge from the preceding sections are discussed and conclusions are drawn. Although the Stern Review is scientifically documented, based on the latest and most trustful scientific research, apart from receiving favourable comments, it has also been subjected to criticism. Some of the favourable comments are presented in the following section, together with some points of critique. It was felt appropriate that, in the final section, a broader reference to the relevant discussion be made.
REVIEWS OF CLIMATE CHANGE IMPACTS Several attempts have been made and reports have been published in recent years with the aim to assess climate change impacts on economy and society. Some of them arrive at recommendations about how to adapt to such impacts. Mitigation policies are also suggested. The reports published have all attracted conflicting views about how sound is their scientific base and how reasonable their conclusions are. Nevertheless, all these efforts have helped enormously to create public awareness and increase sensitivity about the climate change issue. The largest, most widely known and discussed and most influential report of its kind is the Stern Review on the Economics of Climate Change. The Stern Review (Stern Review, 2006) is a thorough treatment of the effects of global warming on the world economy and society and was released on October 30, 2006, by economist and academic Sir Nikolas Stern for the Government of the United Kingdom. Among its main conclusions is that 1% of global gross domestic product (GDP) per annum is required to be invested in order to avoid the worst effects of climate change, and that failure to do so could risk global GDP being up to 20% lower than it otherwise might be. The Review also suggests that climate change threatens to be the greatest and widest-ranging market failure ever seen, and it provides prescriptions, including environmental taxes, to minimize the economic and social disruptions. The Review received numerous, favorable or critical, responses. Several scientists have supported Stern’s approach and insisted that governments must act, or argued Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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that Stern’s conclusions are reasonable, even if the method (notably the use of incorrect discount rate), by which he reached them, is incorrect. Thus, Joseph Stiglitz, Nobel Prize economist, made the following statement (Wikipedia, 2008): “The Stern Review of the Economics of Climate Change provides the most thorough and rigorous analysis to date of the costs and risks of climate change, and the costs and risks of reducing emissions. It makes clear that the question is not whether we can afford to act, but whether we can afford not to act. To be sure, there are uncertainties, but what it makes clear is that the downside uncertainties - aggravated by the complex dynamics of long delays, complex interactions, and strong non-linearities - make a compelling case for action. And it provides a comprehensive agenda - one which is economically and politically feasible - behind which the entire world can unite in addressing this most important threat to our future well being”. Geoffrey Heal of Columbia Business School, asking “what have we learned from the outpouring of literature as a result of the Stern Review of the Economics of Climate Change?” gives the following answer: “A lot. We have explored the models and the possible parameter values much more thoroughly. The Stern Review has catalyzed a fundamental rethinking of the economic case for action on climate change. We are now in a position to identify conditions that are sufficient to make a case for strong action on climate change, but more work is needed before we can have a fully satisfactory account of the relevant economics. In particular, we need to better understand how climate change affects natural capital - the natural environment and the ecosystems comprising it - and how this in turn affects human welfare” (Heal, 2008). On the other hand, the Stern Review received also negative reaction. Critics, particularly economists, argued that Stern had overestimated the present value of the costs of climate change, and underestimated the costs of emission reduction as a result of using an incorrect discount rate in his calculations. Others argued that the economic cost of the proposals put forward by Stern and his team would be severe while at the same time of doubtful positive effect, or that the scientific consensus view on global warming, on which Stern relied, was incorrect. Several critics, particularly natural scientists, criticized Stern arguing that he had underestimated the costs of damage from climate change, particularly damage to natural environments, and that more aggressive action was needed. Finally, some economists endorsed the main findings of the Review, while noting that some of the assumptions in the Review’s analysis were open to debate. For example, Nobel prize winner Kenneth Arrow wrote: “Critics of the Stern Review don’t think serious action to limit CO2 emissions is justified, because there remains substantial uncertainty about the extent of the costs of global climate change, and because these costs will be incurred far in the future. However, I believe that Stern’s
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fundamental conclusion is justified: we are much better off reducing CO2 emissions substantially than risking the consequences of failing to act, even if, unlike Stern, one heavily discounts uncertainty and the future” (Arrow, 2007). It should be noted that Stern, while stating that the new findings, notably the latest IPCC Report (IPCC, 2007) vindicated the results of his work, which have been criticized by climate sceptics and some economists as exaggerating the possible damage, went further, revising some of his estimates which appeared in his Review: “Emissions are growing much faster than we’d thought, the absorptive capacity of the planet is less than we’d thought, the risks of greenhouse gases are potentially bigger than more cautious estimates and the speed of climate change seems to be faster … People who said I was scaremongering were profoundly wrong”, he told a conference in London (The Guardian, 2008). Stern also noted that, because global warming is happening faster than predicted, the cost to reduce carbon would be even sharper (about 2% of GDP instead of the 1% in the original report) (The Guardian, 2008a). The above estimates have been shared by another study, similar to Stern’s, which was conducted in Australia in 2008 by Ross Garnaut (The Garnaut Climate Change Review, 2008). This study broadly endorsed Stern’s approach. However, it concluded that Stern had underestimated the severity of the problem and the extent of cuts required regarding emissions in order to avoid big risks from climate change. The report’s key recommendation was to implement an emissions trading scheme, a subject which will be treated in the sequel.
Implications for People around the World How climate change is and will be affecting people around the world? Chapter 3 of Part II of the Stern Review examines the impacts on people as the world warms, which is characterized “increasingly serious”, and explores, in particular, how climate change will affect people around the world, including the potential implications for access to food, water stress, health and well-being, and the environment. Key messages are given, which refer to phenomena like melting glaciers, declining crop yields, ocean acidification, rising sea levels, malnutrition and heat stress, permanent displacement of millions of people and vulnerability of ecosystems (Stern Review, p. 56). In particular, according to the Review, “Climate change threatens the basic elements of life for people around the world – access to water, food, health, and use of land and the environment. On current trends, average global temperatures could rise by 2 - 3°C within the next fifty years or so, leading to many severe impacts, often mediated by water, including more frequent droughts and floods”. The above as well as all other changes in global mean temperature referred to in the Review are expressed relative to pre-industrial levels, i.e. 1750 - 1850. A temperature rise Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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of 1°C represents the range 0.5 – 1.5°C, a temperature rise of 2°C represents the range 1.5 – 2.5°C, etc. Threats envisaged include:
Melting Glaciers They will increase flood risk during the wet season and strongly reduce dry-season water supplies to one-sixth of the world’s population, predominantly in the Indian sub-continent, parts of China, and the Andes in South America.
Declining Crop Yields They are likely to leave hundreds of millions without the ability to produce or purchase sufficient food, especially in Africa. This will take place particularly if the carbon fertilization effect is weaker than previously thought, as some recent studies suggest (carbon fertilization effect is the positive effect of increased atmospheric concentrations of carbon dioxide on plant growth due to the enhancement of photosynthesis rates, allowing more effective carbon fixation). At mid to high latitudes, crop yields may increase for moderate temperature rises (2 – 3°C), but then decline with greater amounts of warming.
Ocean Acidification It will have major effects on marine ecosystems, with possible adverse consequences on fish stocks (ocean acidification is a direct result of rising carbon dioxide levels).
Rising Sea Levels They will result in tens to hundreds of millions more people flooded each year with a warming of 3 or 4°C. There will be serious risks and increasing pressures for coastal protection in South East Asia (Bangladesh and Vietnam), small islands in the Caribbean and the Pacific, and large coastal cities, such as Tokyo, Shanghai, Hong Kong, Mumbai, Calcutta, Karachi, Buenos Aires, St Petersburg, New York, Miami and London.
Deaths from Malnutrition and Heat Stress Climate change will increase them worldwide. Vector-borne diseases such as malaria and dengue fever could become more widespread if effective control measures are not in place. In higher latitudes, cold-related deaths will decrease. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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People Permanently Displaced By the middle of the century, 200 million more people may become permanently displaced due to rising sea levels, heavier floods, and more intense droughts, according to one estimate.
Species Extinction Ecosystems will be particularly vulnerable to climate change, with one study estimating that around 15 – 40% of species face extinction with 2°C of warming. Strong drying over the Amazon, as predicted by some climate models, would result in plant deceases (dieback) of the forest with the highest biodiversity on the planet. The Review continues with the consequences of climate change with increased warming. These consequences will become disproportionately more damaging, with higher temperatures increasing the chance of triggering abrupt and large-scale changes that will lead to regional disruption, migration and conflict. The following key messages are given, in particular, regarding the consequences of sudden shifts in regional weather patterns and melting or collapse of ice sheets:
Sudden Shifts in Regional Weather Patterns Warming may induce sudden shifts in regional weather patterns like the monsoons or the El Niño. The consequences of such changes for water availability and flooding in tropical regions would be severe and the livelihoods of billions would be threatened.
Melting/collapse of Ice Sheets Sea levels may be raised and eventually at least 4 million km2 of land, which today is home to 5% of the world’s population, may be threatened as a result of melting or collapse of ice sheets. In conclusion, according to the Stern Review, climate change will have increasingly severe impacts on people around the world, with a growing risk of abrupt and large-scale changes at higher temperatures. These impacts are summarized across several sectors as follows:
Water •
People will feel the impact of climate change most strongly through changes in the distribution of water around the world and its seasonal and annual variability.
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•
•
As the water cycle intensifies, billions of people will lose or gain water. Some risk becoming newly or further water stressed, while others see increases in water availability. Seasonal and annual variability in water supply will determine the consequences for people through floods or droughts. Melting glaciers and loss of mountain snow will increase flood risk during the wet season and threaten dry-season water supplies to one-sixth of the world’s population (over one billion people today).
Food •
•
•
In tropical regions, even small amounts of warming will lead to declines in yield. In higher latitudes, crop yields may increase initially for moderate increases in temperature but then fall. Higher temperatures will lead to substantial declines in cereal production around the world, particularly if the carbon fertilization effect mentioned above is smaller than previously thought, as some recent studies suggest. Declining crop yields are likely to leave hundreds of millions without the ability to produce or purchase sufficient food, particularly in the poorest parts of the world. Ocean acidification, a direct result of rising carbon dioxide levels, will have major effects on marine ecosystems, with possible adverse consequences on fish stocks.
Health •
Climate change will increase worldwide deaths from malnutrition and heat stress. Vector-borne diseases such as malaria and dengue fever could become more widespread if effective control measures are not in place. In higher latitudes, cold-related deaths will decrease.
Land •
•
Sea level rise will increase coastal flooding, raise costs of coastal protection, lead to loss of wetlands and coastal erosion, and increase saltwater intrusion into surface and groundwater. The homes of tens of millions more people are likely to be affected by flooding from coastal storm surges with rising sea levels. People in South and East Asia will be most vulnerable, along with those living on the coast of Africa and on small islands.
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•
Some estimates suggest that 150 - 200 million people may become permanently displaced by the middle of the century due to rising sea levels, more frequent floods, and more intense droughts.
Infrastructure •
Damage to infrastructure from storms will increase substantially from only small increases in event intensity. Changes in soil conditions from droughts or permafrost (ground that remains at or below 0°C for at least two consecutive years) melting will influence the stability of buildings.
Environment •
Climate change is likely to occur too rapidly for many species to adapt. One study estimates that around 15 – 40% of species face extinction with 2°C of warming. Strong drying over the Amazon, as predicted by some climate models, would result in dieback of forest with the highest biodiversity on the planet.
Non-Linear Changes and Threshold Effects • • •
Warming will increase the chance of triggering abrupt and large-scale changes. Melting/collapse of polar ice sheets would accelerate sea level rise and eventually lead to substantial loss of land, affecting around 5% of the global population. Warming may induce sudden shifts in regional weather patterns that have severe consequences for water availability in tropical regions.
The impacts on people around the world, as summarized above by the Review, will be felt unevenly by different sectors of economy. The sectors belonging to the “danger zone”, i.e. the set of sectors facing the most severe consequences of global warming, include aviation, the financial sector, health care, oil and gas, tourism and transport. There are several interesting reports about these “danger zone” sectors, which are listed in (KPMG, 2008).
Implications for Developing Countries The different countries of the world are not equally vulnerable to climate change, according to the Review. While all regions will eventually feel the effects of climate change, some are already suffering more and will suffer in the future much more than others. This is particularly true regarding the group of developing counties. Indeed, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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the implications of climate change for this group of countries, particularly to poor communities who are already living at or close to the margins of survival, are much harder than those for developed countries, owing to “a volatile mix of geographic location, existing vulnerability and, linked to this, limited ability to deal with the pressures that climate change will create”, as the Review puts it (Stern Review, p. 55). This is explained by the fact that developing countries are especially vulnerable to the physical impacts of climate change because of their exposure to an already fragile environment, an economic structure that is highly sensitive to an adverse and changing climate, and low incomes that constrain their ability to adapt. Several key messages for developing countries are given including (Stern Review, p. 92):
Poverty Reduction Climate change poses a real threat to the developing world. Unchecked it will become a major obstacle to continued poverty reduction.
Vulnerability to Climate Change Developing countries are especially vulnerable to climate change because of their geographic exposure, low incomes, and greater reliance on climate sensitive sectors such as agriculture. Ethiopia, for example, already has far greater hydrological variability than North America but less than 1% of the artificial water storage capacity per capita. Together these mean that impacts are proportionally greater and the ability to adapt smaller.
Cost of Natural Disasters Many developing countries are already struggling to cope with their current climate. For low-income countries, major natural disasters today can cost an average of 5% of GDP. Health and agricultural incomes will be under particular threat from climate change. For example, falling farm incomes will increase poverty and reduce the ability of households to invest in a better future and force them to use up meagre savings just to survive. Millions of people will potentially be at risk of climate-driven heat stress, flooding, malnutrition, water related disease and vector borne diseases. The cost of climate change in India and South East Asia could be as high as a 9-13% loss in GDP by 2100 compared with what could have been achieved in a world without climate change. Up to an additional 145-220 million people could be living on less than $2 a day and there could be an additional 165,000 to 250,000 child deaths per year in South Asia and sub-Saharan Africa by 2100 (due to income losses alone).
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Migration and Conflict Severe deterioration in the local climate could lead, in some parts of the developing world, to mass migration and conflict, especially as another 2-3 billion people are added to the developing world’s population in the next few decades. Thus rising sea levels, advancing desertification and other climate-driven changes could drive millions of people to migrate: more than a fifth of Bangladesh could be under water with a 1m rise in sea levels – a possibility by the end of the century. Also drought and other climate-related shocks risk sparking conflict and violence, with West Africa and the Nile Basin particularly vulnerable given their high water interdependence. These risks, as noticed in the Review, “place an even greater premium on fostering growth and development to reduce the vulnerability of developing countries to climate change. However, little can now be done to change the likely adverse effects that some developing countries will face in the next few decades, and so some adaptation will be essential. Strong and early mitigation is the only way to avoid some of the more severe impacts that could occur in the second half of this century”. Other public agencies, notably DEFRA (the United Kingdom’s Department for Environment, Food and Rural Affairs), arrive at conclusions similar to the above. For example, it is estimated that, by 2100, if significant mitigation does not take place, around half of the planet’s land surface will be liable to drought. Also, some less developed countries are likely to be severely affected. Africa, South America and parts of South East Asia are likely to see worsening conditions. Indeed, drought can lead to failed harvests and famine. Those likely to be hardest hit are in developing countries where populations rely heavily on rain fed agriculture and food infrastructures are less resilient (DEFRA, 2006). To simulate climate on local scales, the Met Office Hadley Centre has developed a regional climate modelling system, PRECIS (Providing Regional Climates for Impacts Studies). Regional climate models employ higher resolution than global models and add valuable detail to regional climate scenarios which are required when assessing a region’s vulnerability to climate change. PRECIS can be run on a personal computer and applied easily to any area of the globe. It is available free of charge to developing countries so that they can produce high resolution climate change scenarios at national centres of expertise (PRECIS, 2008).
Implications for Developed Countries The picture is quite different than the above in the case of developed countries. Thus, Chapter 5 of Part II of the Stern Review gives the following key messages
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regarding the cost to developed countries due to climate change (Stern Review, Part II, Chapter 5, p. 1).
Effects on Different Countries Climate change will have some positive effects for a few developed countries for moderate amounts of warming, but will become very damaging at the higher temperatures that threaten the world in the second half of this century. In higher latitude regions, such as Canada, Russia and Scandinavia, climate change could bring net benefits up to 2 or 3°C through higher agricultural yields, lower winter mortality, lower heating requirements, and a potential boost to tourism. But these regions will also experience the most rapid rates of warming with serious consequences for biodiversity and local livelihoods. In lower latitudes, developed countries will be more vulnerable. Regions where water is already scarce will face serious difficulties and rising costs. Recent studies suggest a 2°C rise in global temperatures may lead to a 20% reduction in water availability and crop yields in southern Europe and a more erratic water supply in California, as the mountain snowpack melts by 25 – 40%. In the USA, one study predicts a mix of costs and benefits initially (± 1% GDP), but then declines in GDP even in the most optimistic scenarios once global temperatures exceed 3°C. Finally, the poorest will be the most vulnerable. People on lower incomes are more likely to live in poor quality housing in higher-risk areas and have fewer financial resources to cope with climate change, including lack of comprehensive insurance cover.
Costs of Extreme Weather Events The costs of extreme weather events, such as storms, floods, droughts, and heat waves, will increase rapidly at higher temperatures, potentially counteracting some of the early benefits of climate change. Costs of extreme weather alone could reach 0.5 - 1% of world GDP by the middle of the century, and will keep rising as the world warms. In particular, damage from hurricanes and typhoons will increase substantially from even small increases in storm severity, because they scale as the cube of wind speed or more. A 5 – 10% increase in hurricane wind speed is predicted to approximately double annual damages, resulting in total losses of 0.13% of GDP each year on average in the USA alone. The costs of flooding in Europe are likely to increase, unless flood management is strengthened in line with the rising risk. In the UK, annual flood losses could increase from around 0.1% of GDP today to 0.2 – 0.4% of GDP once global temperature increases reach 3 to 4°C. Finally, heat waves like 2003 in Europe, when 35,000 people died and agricultural losses reached $15 billion, will be commonplace by the middle of the century. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Higher Temperature Shocks At higher temperatures, developed economies face a growing risk of large-scale shocks. Extreme weather events could affect trade and global financial markets through disruptions to communications and more volatile costs of insurance and capital. Major areas of the world could be devastated by the social and economic consequences of very high temperatures. This could lead to large-scale and disruptive population movement and trigger regional conflict.
MONETARY COSTS OF CLIMATE CHANGE How existing modelling work that has been done may be pulled together to estimate the monetary costs of climate change? Chapter 6 of Part II of the Stern Review under the title “Economic modelling of climate-change impacts” summarizes this work and concludes giving several quantitative results and important key messages. The chapter also sets out the detail of modelling work undertaken by the Review. Starting with the statement that “the cost of climate change is now expected to be larger than many earlier studies suggested” (Stern Review, p. 144) the chapter brings together estimates from formal models of the monetary cost of climate change, including evidence on how these costs rise with increasing temperatures. It also builds on and complements the evidence presented in previous chapters of the Review concerning the consequences of climate change for key indicators of development such as income, health and the environment. Making use of a model that is able to summarize cost simulations across a wide range of possible impacts, the Review estimates the total cost of ‘business as usual’ climate change over the next two centuries as equal to an average welfare loss equivalent to at least 5% of the value of global per-capita consumption, now and forever. It notes, however, that this is a minimum in the context of this model, and there are a number of omitted features that would add substantially to this estimate. Thus the cost is shown to be higher if recent scientific findings about the responsiveness of the climate system to greenhouse gas emissions turn out to be correct and if direct impacts on the environment and human health are taken into account. This cost would be even higher should the model also reflect the importance of the disproportionate burden of climate change impacts on poor regions of the world: putting all these together, the cost could be equivalent to up to around 20%, now and forever. In arriving at such conclusions the Review notes, however, that the large uncertainties in this type of modelling and calculation should not be ignored. In any case, the Review concludes that ‘business as usual’ climate change implies the equivalent of a permanent reduction in consumption that is strikingly large. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Key messages of the Stern Review on the monetary costs of climate change include the following (Stern Review, p. 143).
Costs Higher Than Suggested The monetary cost of climate change is now expected to be higher than many earlier studies suggested, because these studies tended not to include some of the most uncertain but potentially most damaging impacts.
Caution in Interpreting Results Modelling the overall impact of climate change is a formidable challenge, involving forecasting over a century or more as the effects appear with long lags and are very long-lived. The limitations to our ability to model over such a time scale demand caution in interpreting results, but projections can illustrate the risks involved – and policy here is about the economics of risk and uncertainty.
Warming Around 2 - 3°C Most formal modelling has used as a starting point 2 - 3°C warming. In this temperature range, the cost of climate change could be equivalent to around a 0 - 3% loss in global GDP from what could have been achieved in a world without climate change. Poor countries will suffer higher costs.
Warming Exceeding 2 - 3°C ‘Business as usual’ temperature increases may exceed 2 - 3°C by the end of this century. This increases the likelihood of a wider range of impacts than previously considered, more difficult to quantify, such as abrupt and large-scale climate change. With 5 - 6°C warming, models that include the risk of abrupt and large-scale climate change estimate a 5 - 10% loss in global GDP, with poor countries suffering costs in excess of 10%. The risks, however, cover a very broad range and involve the possibility of much higher losses. This underlines the importance of revisiting past estimates.
Weight to the Future Modelling over many decades, regions and possible outcomes demands that we make distributional and ethical judgements systematically and explicitly. Attaching little weight to the future, simply because it is in the future (‘pure time discounting’), Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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would produce low estimates of cost – but if you care little for the future you will not wish to take action on climate change.
‘Business as Usual’ Cost Using an Integrated Assessment Model, and with due caution about the ability to model, we estimate the total cost of ‘business as usual’ climate change to equate to an average reduction in global per capita consumption of 5%, at a minimum, now and forever.
Factors Increasing ‘Business as Usual’ Cost The cost of ‘business as usual’ would increase still further, should the model take account of three important factors: First, including direct impacts on the environment and human health (‘non-market’ impacts) increases the total cost of ‘business as usual’ climate change from 5% to 11%, although valuations here raise difficult ethical and measurement issues. But this does not fully include ‘socially contingent’ impacts such as social and political instability, which are very difficult to measure in monetary terms; Second, some recent scientific evidence indicates that the climate system may be more responsive to greenhouse gas emissions than previously thought, because of the existence of amplifying feedbacks in the climate system. The potential scale of the climate response could increase the cost of ‘business as usual’ climate change from 5% to 7%, or from 11% to 14% if non-market impacts are included. In fact, these may be only modest estimates of the bigger risks; third, a disproportionate burden of climate change impacts fall on poor regions of the world. Based on existing studies, giving this burden stronger relative weight could increase the cost of ‘business as usual’ by more than one quarter. The Review concludes that “putting these three additional factors together would increase the total cost of ‘business as usual’ climate change to the equivalent of around a 20% reduction in current per-capita consumption, now and forever. Distributional judgements, a concern with living standards beyond those elements reflected in GDP, and modern approaches to uncertainty, all suggest that the appropriate estimate of damages may well lie in the upper part of the range 5 – 20%. Much, but not all, of that loss could be avoided through a strong mitigation policy” (Stern Review, p. 143). Figure 1 traces the global monetary cost of climate change with increases in global mean temperature above pre-industrial levels (shown on the x-axis), according to three models (Smith et al., 2001, Fig. 19-4, p. 943):
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•
•
•
• •
‘Mendelsohn, output’ traces the estimates of (Mendelsohn et al., 1998), with regional monetary impact estimates aggregated to world impacts without weighting; ‘Nordhaus, output’ traces the estimates of (Nordhaus & Boyer, 2000), with regional monetary impact estimates aggregated to world impacts without weighting; ‘Nordhaus, population’ also traces the estimates of (Nordhaus and Boyer, 2000), with regional monetary impact estimates aggregated to world impacts based on regional population; ‘Tol, output’ traces the estimates of (Tol, 2002), with regional monetary impact estimates aggregated without weighting; ‘Tol, equity’ also traces the estimates of (Tol, 2002), with regional monetary impacts aggregated to world impacts weighting by the ratio of global average per-capita income to regional average per capita income.
Figure 1 illustrates the results of the above models at different global mean temperature rises - the assumptions of the models are reported in detail in (Warren et al., 2006). The Stern Review summarizes the main features of the models as follows (Stern Review, p. 147):
Figure 1. Monetary impacts as a function of level of climate change (measured as percentage of global GDP). (Source: Smith et al., 2001)
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The Mendelsohn Model It estimates impacts only for five ‘market’ sectors: agriculture, forestry, energy, water and coastal zones. The global impact of climate change is calculated to be very small and is positive for increases in global mean temperature up to about 4°C above pre-industrial levels.
The Tol Model It estimates impacts for a wider range of market and non-market sectors: agriculture, forestry, water, energy, coastal zones and ecosystems, as well as mortality from vector-borne diseases, heat stress and cold stress. Costs are weighted either by output or by equity-weighted output. The model estimates that initial increases in global mean temperature would actually yield net global benefits. Since these benefits accrue primarily to rich countries, the method of aggregation across countries matters for the size of the global benefits. According to the output-weighted results, global benefits peak at around 2.5% of global GDP at a warming of 0.5°C above pre-industrial. But, according to the equity-weighted results, global benefits peak at only 0.5% of global GDP (also for a 0.5°C temperature increase). Global impacts become negative beyond 1°C (equity-weighted) or 2 - 2.5°C (output-weighted), and they reach 0.5 - 2% of global GDP for higher increases in global mean temperature.
The Nordhaus Model It includes a range of market and non-market impact sectors: agriculture, forestry, energy, water, construction, fisheries, outdoor recreation, coastal zones, mortality from climate-related diseases and pollution, and ecosystems. It also includes what were at the time pioneering estimates of the economic cost of catastrophic climate impacts, namely, the small probability of losses in GDP running into tens of percentage points. These catastrophic impacts drive much of the larger costs of climate change at high levels of warming. At 6°C warming, this model estimates a global cost of between around 9 - 11% of global GDP, depending on whether regional impacts are aggregated by output (lower) or population (higher). The model also predicts that the cost of climate change will increase faster than global mean temperature, so that the aggregate loss in global GDP almost doubles as global mean temperature increases from 4°C to 6°C above preindustrial levels. This reflects the fact that higher temperatures will increase the chance of triggering abrupt and large-scale changes, such as sudden shifts in regional weather patterns like the monsoons or the El Niño phenomenon.
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As the Stern Review points out, the models differ on whether low levels of global warming would have positive or negative global effects. But all agreed that the effects of warming above 2 - 3°C would reduce global welfare, and that even mild warming would harm poor countries. These results are quite difficult to compare, because of the many differences between the models and the inputs they use, but some key points can be made: •
•
Up to around 2 - 3°C warming, there is disagreement about whether the global impact of climate change will be positive or negative. But, even at these levels of warming, it is clear that any benefits are temporary and confined to rich countries, with poor countries suffering significant costs. For warming beyond 2 - 3°C, the models agree that climate change will reduce global consumption. However, they disagree on the size of this cost, ranging from a very small fraction of global GDP to 10% or more. In this range too, the models agree that poor countries will suffer the highest costs, although in the Nordhaus model the estimated cost to Western Europe of 6°C warming is second only to the cost to Africa.
Some remarks of the Stern Review are worthy noticing. Τhus, concerning the above results, “these depend on key modelling decisions, including how each model values the costs to poor regions and what it assumed about societies’ ability to reduce costs by adapting to climate change. Each model’s results depend heavily on how it aggregates the impacts across regions, and in particular how it values costs in poor regions relative to those in rich ones. The prices of marketed goods and services, as well as the hypothetical values assigned to health and the environment, are typically higher in rich countries than in poor countries. Thus, in these models, a 10% loss in the volume of production of an economic sector is worth more in a rich country than in a poor country. Similarly, a 5% increase in mortality, if ‘values of life’ are based on willingness to pay, is worth more in purely monetary terms in a rich country than a poor country, because incomes are higher in the former. Many ethical observers would reject both of these statements. Thus some of the authors have used welfare or ‘equity’ weighting …In summary, if aggregation is done purely on the basis of adding incomes or GDP, then very large physical impacts in poor countries will tend to be over-shadowed by small impacts in rich countries” (Stern Review, p. 148). Apart from the Stern Review, several other attempts have been made to estimate the monetary costs of climate change. What is characteristic of the Stern Review, however, is the fact that it addresses the issue on a global scale. Other works focus on a regional scale. Notable among them is the study on the U.S. market consequences of global climate change, prepared for the Pew Center on Global Climate Change by a team of authors (Jorgenson et al., 2004). The study aims to advance Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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understanding of the potential consequences of global climate change by examining the overall effect on the U.S. economy of predicted impacts in key market activities that are likely to be particularly sensitive to future climate trends. These activities include crop agriculture and forestry, energy services related to heating and cooling, commercial water supply, and the protection of property and assets in coastal regions. The study also considers the effects on livestock and commercial fisheries and the costs related to increased storm, flood and hurricane activity. Finally, the analysis accounts for population-based changes in labour supply and consumer demand due to climate-induced mortality and morbidity. Impacts in each of these areas were modelled to estimate their aggregate effect on national measures of economic performance and welfare, including GDP, consumption, investment, labor supply, capital stock and leisure. Five principal conclusions emerge from the study: 1)
2)
3) 4) 5)
Based on the market sectors and range of impacts considered, projected climate change has the potential to impose considerable costs or produce temporary benefits for the U.S. economy over the 21st century, depending on the extent to which pessimistic or optimistic outcomes prevail. For example, under pessimistic assumptions, real U.S. GDP in the low climate change scenario is 0.6% lower in 2100 relative to a baseline that assumes no change in climate; in the high climate change scenario, the predicted reduction in real GDP is 1.9%. Under the additional “high and drier” climate scenario, however, real GDP is reduced more dramatically - by as much as 3.0% by 2100 relative to baseline conditions. Due to threshold effects in certain key sectors, the economic benefits simulated for the 21st century under optimistic assumptions are not sustainable and economic damages are inevitable. The effects of climate change on U.S. agriculture dominate the other market impacts considered in the study. For the economy, wetter is better. All else being equal, more precipitation is better for agriculture - and hence better for the economy - than less precipitation. Changes in human mortality and morbidity are small but important determinants of the modelled impacts of climate change for the U.S. economy as a whole (an increase in climate-induced mortality or illness reduces the population of workers and consumers available to participate in the market economy, in turn leading to a loss of real GDP).
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The above findings are significant. However it is pointed out in the study that caution should be made related to the partial and incomplete nature of the analysis itself, as the study was limited from the outset to considering only market impacts of global climate change within the United States. It is also noted that it was not possible to include all potentially climate-sensitive market sectors in the analysis; nor was it possible to account for all externalities or spill-over effects. Even more significant, in terms of drawing policy conclusions from these results, is the fact that the underlying analysis does not address a host of potential non-market impacts associated with climate change. These include shifts in species distribution, reductions in biodiversity, losses of ecosystem goods and services and changes in human and natural habitats. Such impacts, many of which are explored in other Pew Center reports, are probably of great concern to the public and could carry substantial weight in policy deliberations. They are, however, extremely difficult to value in economic terms.
DISCUSSION AND CONCLUSION As said earlier in this chapter, the Stern Review is the largest, most widely known and discussed and most influential report of its kind, having drawn its arguments and conclusions from a vast amount of scientific literature. In this chapter the most significant Review’s findings concerning the global impacts of climate change have been summarized, including its implications on the environment and people around the world, and more particularly for developing and developed countries, while reference has been made to climate change’s monetary costs. The results of the Stern Review presented above are only part of the Review’s findings. The Review is a comprehensive treatment of the subject of economics of climate change. In addition to Part II, under the title “Impacts of Climate Change on Growth and Development”, the Review includes also an initial part (Part I), where the Review’s approach is presented, and four more parts: Part III (“The Economics of Stabilization”), Part IV (“Policy Responses for Mitigation”), Part V (“Policy Responses for Adaptation”) and Part VI (“International Collective Action”). It also includes a Postcript and a Technical Annex to the Postcript. Summaries of these parts, particularly those related to policies for mitigation and adaptation, will be presented in the following chapters. It was noted in the introductory section of this chapter that the Stern Review has received numerous, favorable or critical, responses. Regarding those who have been sceptical in relation to the Review, most of them have focused their criticism
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on a number of points, including the (over- or under-) estimation of damage due to the discounting procedure used to evaluate flows of costs and benefits occurring in the future, the treatment of the uncertainty, etc. The critique encompasses not only the impacts of “business as usual” climate change but also the expected results of adaptation and mitigation policies suggested by the Stern Review. Thus, a number of critiques have appeared, arguing that discounting is the principal explanation for the discrepancy between some of the Stern Review conclusions and most of those reported in the previous literature (Dietz et al., 2007). More specifically, they refer to the Stern Review conclusions that there can be “no doubt” that the economic risks of business-as-usual climate change are “very severe”, that the total cost of climate change was estimated to be equivalent to a one-off, permanent 5–20% loss in global mean per-capita consumption today and that the marginal damage cost of a tonne of carbon emitted today was estimated to be around $312. They argue that discounting is important, but they emphasize that how one approaches the economics of risk and uncertainty, and how one attempts to model the very closely related issue of low-probability/high-damage scenarios (which they connect to the discussion of ‘dangerous’ climate change), can matter just as much. They demonstrate these arguments empirically, using the same models applied in the Stern Review. They argue that, together, the issues of risk and uncertainty on the one hand, and ‘dangerous’ climate change on the other, raise very strongly questions about the limits of a welfare-economic approach, where the loss of natural capital might be irreversible and impossible to compensate. They critically reflect on the state-of-the-art in integrated assessment modelling stating that there will always be an imperative to carry out integrated assessment modelling, bringing together scientific ‘fact’ and value judgement systematically. They agree, however, with those cautioning against a literal interpretation of current estimates, noting that, ironically, the Stern Review is one of those voices. Finally they point out that a fixation with cost-benefit analysis misses the point that arguments for stabilization should, and are, built on broader foundations. (Hof et al., 2008) note that the Stern Review compares costs and benefits of stringent climate policy and concludes that the benefits of stringent policy considerably outweigh the costs, while many other cost–benefit analyses have come up with less ambitious optimal emission reductions. The authors explore the impacts of scientific uncertainties and value judgements on the suggested ‘‘optimal target’’ for international climate policy. In this context, they have varied the most important parameters using a range of values from several widely used Integrated Assessment Models in one consistent framework. Their analysis shows that uncertainties about abatement and damage costs play an almost equally important role as the discount rate. Both stringent and moderate climate policy can be justified by using other
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parameter settings. Furthermore, for most parameter settings there is a wide range of concentration levels close to the optimal target, providing a much wider range for political choices than often suggested. (Neumayer, 2007) characterizes the Stern Review “a missed opportunity”, arguing that it fails to tackle the issue of non-substitutable loss of natural capital. In particular, while noticing that the Stern Review is one of the few cost-benefit analyses of climate change to come out in favor of immediate and decisive action to reduce greenhouse gas emissions and that the choice of a low discount rate is the main reason for the Review’s divergence in conclusions compared to other economic studies, he argues that the Review’s ethical reasons for a low discount rate are defendable, but unlikely to find wider public support. For Neumayer, in order to justify spending a large amount of scarce resources for the purpose of limiting climate change, it is necessary to move beyond the discounting debate. However, the Review did not develop a persuasive argument for why climate change threatens to inflict upon future generations irreversible and non-substitutable damage to and loss of natural capital. This, according to the author, represents a missed opportunity, as it would have provided a much more compelling case for drastic action than the Review’s arguments for a low discount rate. (Pielke, 2007) notes that the Stern Review has focused the debate on the costs and benefits of alternative courses of action on climate change and this has helped to move the debate away from the science of the climate system and on to issues of policy. However, he notes, a careful examination of the Stern Review’s treatment of the economics of extreme events in developed countries, such as floods and tropical cyclones, shows that the report is selective in its presentation of relevant impact studies and repeats a common error in impacts studies by confusing sensitivity analyses with projections of future impacts. He argues that the Stern Review’s treatment of extreme events is misleading because it overestimates the future costs of extreme weather events in developed countries by an order of magnitude. Because the Stern Report extends these findings globally, the overestimate propagates through the report’s estimate of future global losses. When extreme events are viewed more comprehensively the resulting perspective can be used to expand the scope of choice available to decision makers seeking to grapple with future disasters in the context of climate change. A more comprehensive analysis, in particular, underscores the importance of adaptation in any comprehensive portfolio of responses to climate change. Criticisms like the ones presented above have been met by counter arguments. Characteristic is a comment made by (Barker, 2008, p. 2): “the Stern Review considers traditional cost-benefit analysis as a marginal approach inappropriately applied to global climate change, which is a significant, multidisciplinary and systematic
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problem. This is one reason for the intemperate response from some traditional economists to the Stern Review. Their criticisms illustrate the sensitivity to the implied criticism of their methodologies and conclusions, when equilibrium economics underlies most text books of economics and journals of economic theory”. In support of the Stern Review’s new conclusions about avoiding dangerous climate change (“take strong action urgently, before it is too late” instead of “do little, later”), four issues of critical importance to these new conclusions are underlined, each of which have been either ignored by the traditional literature or treated in a misleading way that discounts the insights from other disciplines: the complexity of the global energy-economy system (including the poverty and sustainability aspects of development), the ethics of intergenerational equity, the understanding from engineering and history about path dependence and induced technological change, and finally the politics of climate policy. The author argues that equilibrium economics fails to provide an adequate and coherent explanation of why human behavior is leading to climate change (via economic choices and the use of the atmosphere as free waste disposal) with the aim of guiding climate policy. We conclude this chapter by noting that the Stern Review on the Economics of Climate Change, together with the IPCC Reports and some other international initiatives, have contributed decisively to raising public awareness and understanding, bringing the issue of climate change and its dramatic implications in the center of public debate and initiating collective action against the “business as usual” practice prevailing until quite recently. The Stern Review main conclusion, namely, that “climate change will have increasingly severe impacts on people around the world, with a growing risk of abrupt and large-scale changes at higher temperatures” (Stern Review, p. 84) is shared by most scientists and governments. As summarized in the Review, “a warmer world with a more intense water cycle and rising sea levels will influence many key determinants of wealth and well-being, including water supply, food production, human health, availability of land, and the environment. While there may be some initial benefits in higher latitudes for moderate levels of warming (1-2°C), the impacts will become increasingly severe at higher temperatures (3, 4 or 5°C)”. The Review notes that there is some evidence in individual sectors for disproportionate increases in damages with increasing temperatures, such as heat stress. However, the most powerful consequences will arise when interactions between sectors magnify the effects of rising temperatures. It is pointed out that, “for example, infrastructure damage will rise sharply in a warmer world, because of the combined effects of increasing potency of storms from warmer ocean waters and the increasing vulnerability of infrastructure to rising wind speeds. At the same time, the science is becoming stronger, suggesting that higher temperatures
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will bring a growing risk of abrupt and large-scale changes in the climate system, such as melting of the Greenland Ice Sheet or sudden shift in the pattern of monsoon rains. Such changes are still hard to predict, but their consequences could be potentially catastrophic, with the risk of large-scale movement of populations and global insecurity”. The Review, having examined the full costs in aggregate, arrives at the conclusion that modeling efforts, though still limited, do provide a powerful tool for taking a comprehensive look at the impacts of climate change. The primary focus should be on the underlying detail rather than the aggregate models, as it is not possible in aggregate models to bring out the key elements of the effects, much is lost in aggregation, and the particular model structure can have their own characteristics. What matters, according to the Review, is the magnitude of the risks of different kind for different people and also the fact that they rise so sharply as temperatures move upwards. It is the poorest that will be hit earliest and most severely. In many developing countries, even small amounts of warming will lead to declines in agricultural production. This is because crops are already close to critical temperature thresholds. The most serious and widespread human consequences will be in SubSaharan Africa, where millions more will die from malnutrition, diarrhea, malaria and dengue fever, unless effective control measures are in place. There will be acute risks all over the world - from the Inuits in the Arctic to the inhabitants of small islands in the Caribbean and Pacific. Developed countries, although they may experience some initial benefits from warming (e.g. longer growing seasons for crops, less winter mortality, reduced heating demands), they will also suffer because these initial benefits are likely to be short-lived and counteracted at higher temperatures by sharp increases in damaging extreme events such as hurricanes, floods, and heat waves. In view of the above potential severe implications of climate change, it is only natural to try to explore possible adaptation and/or mitigation policies that would be appropriate to abate or stabilize these impacts. Before doing this, we shall focus, in the next chapter, on the supply chain operations and the way they are or will be affected by climate change, as supply chains, particularly their management, and its relationship with climate change, lie in the core of this book’s concern.
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Barker, T. (2008). The economics of avoiding dangerous climate change. Tyndall Centre for Climate Change Research. Working Paper 117. Retrieved December 3, 2008, from http://www.tyndall.ac.uk/publications/working_papers/twp117.pdf DEFRA. (2006). Effects of climate change in developing countries. Retrieved December 3, 2008, from http://www.metoffice.gov.uk/research/hadleycentre/pubs/ brochures/2006/cop12/COP12_Brochure.pdf Dietz, S., Hope, C., & Patmore, N. (2007). Some economics of ‘dangerous’ climate change: Reflections on the Stern Review. Global Environmental Change, 17, 311–325. doi:10.1016/j.gloenvcha.2007.05.008 EPA. (2009). Agriculture and Food Supply. Retrieved November 3, 2009, from http://www.epa.gov/climatechange/effects/agriculture.html Forster, P., Ramaswamy, V., Artaxo, P., Berntsen, T., Betts, R., & Fahey, D. W. (2007). Changes in Atmospheric Constituents and in Radiative Forcing. In Solomon, S., Qin, D., Manning, M., Chen, Z., Marquis, M., & Averyt, K. B. (Eds.), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press. Heal, J. (2008, September 24). Review of Environmental Economics and Policy, Advance Access. Retrieved December 3, 2008, from http://reep.oxfordjournals.org/ cgi/content/abstract/ren014v1 Hof, A. F., den Elzen, M. G. J., & van Vuuren, D. P. (2008). Analysing the costs and benefits of climate policy: Value judgements and scientific uncertainties. Global Environmental Change, 18(3), 412–424. doi:10.1016/j.gloenvcha.2008.04.004 Husain, T., & Chaudhary, J. R. (2008). Human Health Risk Assessment due to Global Warming – A Case Study of the Gulf Countries. Int. J. Environ. Res. Public Health, 5(4), 204-212. Retrieved March 3, 2009, from http://www.mdpi.com/16604601/5/4/204 IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm Jorgenson, D. W., Goettle, R. J., Hurd, B. H., Smith, J. B., Chestnut, L. G., & Mills, D. M. (2004). U.S. market consequences of global climate change. Pew Center on Global Climate Change. Retrieved December 3, 2008, from http://www.pewclimate. org/docUploads/Market_Consequences-report.pdf Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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KPMG. (2008). Interesting reports on the risks of climate change for sectors in the danger zone. Retrieved December 3, 2008, from http://www.kpmg.nl/Docs/ Corporate_Site/Danger_zone.pdf Mendelsohn, R. O., Morrison, W. N., Schlesinger, M. E., & Andronova, N. G. (1998). Country-specific market impacts of climate change. Climatic Change, 45(3-4), 553–569. Neumayer, E. (2007). A missed opportunity: The Stern Review on climate change fails to tackle the issue of non-substitutable loss of natural capital. Global Environmental Change, 17, 297–301. doi:10.1016/j.gloenvcha.2007.04.001 Nordhaus, W. D., & Boyer, J. G. (2000). Warming the World: the Economics of the Greenhouse Effect. Cambridge, MA: MIT Press. Pielke, P. Jr. (2007). Mistreatment of the economic impacts of extreme events in the Stern Review Report on the Economics of Climate Change. Global Environmental Change, 17, 302–310. doi:10.1016/j.gloenvcha.2007.05.004 PRECIS. (2008). Retrieved December 3, 2008, from http://www.precis.org.uk Smith, J. B., Schellnhuber, H.-J., & Mirza, M. M. Q. (2001). Vulnerability to climate change and reasons for concern: a synthesis. In Climate Change 2001: Impacts, Adaptation and Vulnerability. Intergovernmental Panel on Climate Change (pp. 913967). Cambridge, UK: Cambridge University Press. Retrieved December 3, 2008, from http://www.grida.no/CLIMATE/IPCC_TAR/wg2/pdf/wg2TARchap19.pdf Stern Review. (2006). Stern Review on the Economics of Climate Change. HM Treasury, Cabinet Office. Retrieved December 3, 2008, from http://www.hm-treasury. gov.uk/stern_review_report.htm The Garnaut Climate Change Review. (2008). Retrieved December 3, 2008, from http://en.wikipedia.org/wiki/Garnaut_Climate_Change_Review The Guardian. (2008). I underestimated the threat, says Stern. Retrieved December 3, 2008, from http://www.guardian.co.uk/environment/2008/apr/18/climatechange. carbonemissions The Guardian. (2008a). Cost of tackling global climate change has doubled, warns Stern. Retrieved December 3, 2008, from http://www.guardian.co.uk/environment/2008/jun/26/climatechange.scienceofclimatechange Tol, R. S. J. (2002). Estimates of the damage costs of climate change - part II: dynamic estimates. Environmental and Resource Economics, 21, 135–160. doi:10.1023/A:1014539414591 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Warren, R., Hope, C., Mastrandrea, M., Tol, R., Adger, N., & Lorenzoni, I. (2006). Spotlighting impacts functions in integrated assessment. Research Report Prepared for the Stern Review on the Economics of Climate Change. Retrieved December 3, 2008, from http://www.tyndall.ac.uk/publications/working_papers/twp91.pdf Wikipedia. (2008). Stern Review. Retrieved December 3, 2008, from http:// en.wikipedia.org/wiki/Stern_Review
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Chapter 4
Climate Change and Supply Chain Operations
INTRODUCTION In the previous chapter 3 the focus of the presentation has been on the implications of climate change, as felt globally, for the environment and human societies in developing as well as in developed countries. As noticed there, the Stern Review’s conclusion that “climate change will have increasingly severe impacts on people around the world, with a growing risk of abrupt and large-scale changes at higher temperatures” (Stern Review, 2006) is shared by most scientists and governments. The Review warns that “a warmer world with a more intense water cycle and rising sea levels will influence many key determinants of wealth and well-being, including water supply, food production, human health, availability of land, and the environment” (Stern Review, p. 84). DOI: 10.4018/978-1-61692-800-1.ch004 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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The business world, in particular, is faced with serious physical (and, consequently, economic and market) risks, which vary across different sectors. The cause-effect relations between natural phenomena due to climate change and impacts to companies are easy to establish. The impacts of phenomena such as increased droughts and flooding, greater frequency of heat-waves, increased frequency and intensity of hurricanes, cyclones and storms and sea level rise on business activities may differ depending on type of activity, location etc. Thus, such phenomena may damage industrial plants and commercial premises, disrupt operations (e.g. production and transportation), dislocate plants and customers, reduce purchasing power and decrease consumer demand, deplete agriculture resources etc. At a macro level, they may cause conflicts among social groups and nations and political and social instability, with obvious repercussions on business activities. Figure 1 illustrates the pathways, by which the physical risks of climate change can affect business (Sussman & Freed, 2008, p. 13). This figure, entitled the “Risk Disk”, illustrates three types of risks. Risks to core operations, such as physical plants, are indicated in the innermost circle. Risks to the value chain are listed in the medium ring. The outermost ring displays risks that arise from broader changes in the economy and infrastructure. Examples of risks to core operations include risks to physical structures and assets of the firm due to weather extremes, affecting asset values and requiring repair, redesign and/or relocation. Also, weather extremes may have impacts on the effectiveness or efficiency of production processes, the cost of operations and maintenance (O&M) activities or the quality of a product. Regarding the risks to the value chain, climate change may adversely affect the quality or quantity of inputs into production, or the demand for products. Examples include impacts on natural resources, such as agricultural and forestry products, which are affected by water availability or quality, impacts on health and safety of the workforce, work attendance or health care costs, and impacts on demand for cooling in summer months. Finally, risks to the broader supply and demand network refer to utilities, services, and related infrastructure, which provide support to business operations and production processes, and to supply chains and distribution networks. Related risks include disruption to utilities, especially electricity generation, water supply, and sewerage, which can affect the supply chain. In addition, extreme weather events associated with climate change, such as flooding or high winds, may damage transport infrastructure or slow delivery of inputs and supplies via road, sea or rail. As pointed out in (Sussman & Freed, 2008), a general increase in temperature and a higher frequency of hot summers are likely to result in an increase in buckled rails and rutted roads, which involve substantial disruption and repair costs. During extreme events, such as hurricanes, access disruptions may affect not only the Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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supply of inputs and product deliveries, but also the ability of workers to reach the workplace, or customers to access the business. Note that supply chain operations, which are the subject of the next section, are present in all three sub-areas of the Risk Disk. Management of such operations has to take account and cope effectively with the above risks. Sustainable operations management (OM) integrates the profit and efficiency orientation of traditional OM with broader considerations of the company’s internal and external stakeholders and its environmental impact (Kleindorfer et al., 2005). The evolution towards sustainable OM in recent years is clear in three areas that integrate the three P’s of sustainable OM already referenced in chapter 1, namely People, Planet and the Profit: 1. 2. 3.
Green product and process development Lean and green OM Remanufacturing and closed-loop supply chains.
The relationship between climate change and supply chain operations is the subject of chapter 4. Thus, after a brief analysis of the key terms defining supply chains and related operations, the discussion will focus on specific key operations (e.g. production, transportation etc) and their cause-effect relationships with climate change will be explored. It will be seen that, while supply chains contribute significantly to global warming, the environment responds with impacts on supply Figure 1. The Risk Disk. (Source: Sussman & Freed, 2008)
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chains, which are often severe. Such impacts are felt along the whole set of supply chain activities, as will be made clear in the sequel. The effect of Technology, particularly Information Technology, on the relation between climate change and supply chain operations will be subsequently explored. Finally, several points raised in this chapter will be discussed and some conclusions will be drawn.
SUPPLY CHAIN OPERATIONS AND THEIR MANAGEMENT Several definitions of a supply chain, a model of which appears in Figure 2, may be found in the literature. The simplest one is given by (Lambert et al., 1998): a supply chain is the alignment of firms that bring products or services to market. A broader scope of supply chain is reflected in the definition by (Handfield & Nickols, 1999), according to whom the supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage (extraction), through to the end user, as well as the associated information flows. The flow of materials and information runs both up and down the supply chain. Another definition is given by (Ganeshan & Harrison, 1995), according to whom a supply chain is a network of facilities and distribution options where the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers are performed. In the definition given by (Chopra & Meindl, 2001) the parties involved in a supply chain are named explicitly. Thus, a supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer request. It includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves. Supply chains are complex systems that involve organizations, people, technology and resources and perform, according to the above definitions, specific operations, the supply chain operations, that are required for materials movement and transformation and transfer of associated information. These systems connect upstream suppliers of basic materials and intermediate and finished products to the final consumer through a chain of supply chain operations, sometimes called the value chain or demand chain, that involve all activities, from the acquisition of raw materials through their transformation and distribution to the delivery of finished goods to the end consumer, including materials handling, warehousing, transportation, collection and transfer of returns from customers for reuse, etc. Each link in a supply chain adds value to the product as it moves through the chain. Supply chain management (SCM), which begun to attract interest in the mid1990s, has been considered as the most popular operations strategy for improving organizational competitiveness in the twenty-first century (Gunasekaran et al., 2008). The APICS Dictionary defines SCM as the “design, planning, execution, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally”. According to (Handfield & Nickols, 1999), SCM is the integration of related activities through improved supply chain relationships, to achieve a sustainable competitive advantage. This advantage may be attained by improved strategic positioning and operating efficiency. By means of collaboration and appropriate managerial processes that span functional areas within individual firms and link supply chain partners across organizational boundaries, different operations within the supply chain are coordinated and enhanced, thus attaining the sustainable competitive advantage mentioned above. From the above it is clear that, while supply chain operations are activities that serve the objectives of a supply chain mentioned in the SCM defininition given by APICS, SCM is the design, planning, execution, control, and monitoring of such activities. It is argued that SCM, although is often identified with logistics and logistics management, should be differentiated from the latter. Thus, while SCM, according to the above, is the coordination of production, inventory, location, and transportation among the participant links in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served, logistics is the set of activities required to move and position inventory throughout a supply chain. As such, logistics is a subset of the broader framework of a supply chain, and its functions occur within this framework, as inbound (within the boundaries of a particular company, which is a link of a supply chain) and outbound (outside these boundaries) logistics. Furthermore, logistics is the process that creates value by timing and positioning inventory. It is the combination of a firm’s order management, inventory, transportation, warehousing, materials handling, and packaging, activities that are integrated Figure 2. Graphic presentation of supply chain concept. (Source: Strahan & Van Bodegraven, 2004)
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throughout a facility network. Integration of logistics activities serves to link and coordinate the overall supply chain thus increasing its effectiveness. In sum, to use a commonly cited definition given by (Christopher, 1992), logistics is “the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organisation and its marketing channels in such a way that current and future profitability are maximised through the cost-effective fulfilment of orders” (Harland et al., 1999, p. 661). Over time, firms have increasingly looked to improve the efficiency of their supply chains by revaluating two key types of transactions (White et al., 2004): •
•
Physical flows of material connect members of a supply chain, moving “forward” from suppliers to customers in each link of the chain. In most of the supply chains the physical flows move from raw materials to intermediate components and assemblies to finished products, with value added at each step of the process. Finished products most often enter a distribution system, which may include wholesalers, jobbers, retailers, and other services before reaching the final consumer. Data flows move mostly “backward” from customers to suppliers, as orders are placed for materials, services, parts, and supplies. Accordingly, payments are made, therefore money flows take also place. Each link in the supply chain has its own information and logistics needs, although some information (e.g., long-range sales and production forecasts) is needed by all links for capacity planning and procurement. Each supplier in the chain must know its next-inline customer’s materials requirements, including quantities needed, delivery dates, and shipping instructions. Each customer needs to factor its suppliers’ shipment schedules into its own planning, and must receive shipment notification, quality specifications and invoices as products are delivered.
The two flows in the case of discrete parts manufacturing are shown in Figure 3 (White et al., 2004, p. 2-3). Note that, in the above, only forward movement of materials is considered. However, physical flows of materials may take place also in the reverse channel, from customers to suppliers of materials or to some third parties. Related information flows also take place. These material and information flows concern recovery of used materials intended for recycling or other form of reuse through Reverse Logistics activities, often along closed loop supply chains (Fleischmann et al., 1997, Fleischmann et al., 2001, Dekker et al., 2004, Flapper et al., 2005). Reverse Logistics has been extensively studied during recent years. As pointed out by the European Working Group on Reverse Logistics (http://www.fbk.eur.nl/ Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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OZ/REVLOG/), a group established within the European Community that launched REVLOG, a research project on Reverse Logistics, traditionally, manufacturers did not feel responsible for their products after consumer use. The bulk of end-oflife (EOL) products were dumped or incinerated with considerable damage to the environment. Today, consumers and authorities expect manufacturers to reduce the waste generated by their products. Therefore waste management has received increasing attention. Lately, due to new waste management legislation, the emphasis has been shifting towards recovery, due to the high costs and environmental burdens of disposal. Firms become more and more responsible for collection and treatment of EOL products and packaging materials. As defined by the above Group, Reverse Logistics, in the broadest sense, stands for all operations related to the reuse of products and materials. It refers to all logistic activities to collect, disassemble and process EOL products, product parts, and/or materials in order to ensure a sustainable (environmentally friendly) recovery. The long-term reuse of products in whatever way is beneficial in both environmental and socio-economic respect. The management of these operations can be referred to as Product Recovery Management, concerned with the care for products and materials after they have been used. According to the Group’s site, the main reasons to become active in Reverse Logistics are environmental laws that force firms to take back their products and take care of further treatment, economic benefits of using returned products in Figure 3. Supply Chain Process Flows (Discrete Parts Manufacturing). (Source: White et al., 2004)
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the production process instead of paying high disposal costs, and the growing environmental consciousness of consumers. As consumers and authorities expect manufacturers to reduce the waste generated by their products, waste management has received increasing attention. The basic issues raised in relation to Reverse Logistics refer to the alternatives that are available to recover products, product parts, and materials, those who should perform the various recovery activities, the way the various activities should be performed, the possibility to integrate the activities that are typical for Reverse Logistics with classical production and distribution systems and the costs and benefits of Reverse Logistics, both from an economical as an environmental point of view. As pointed out in (Corbett & Klassen, 2006), when Reverse Logistics and the management of relationships between manufacturing firms and end-users are considered as extensions of the forward supply chain, the concept of a reverse supply chain emerges. However, firms can take different actions to improve the reverse supply chain, depending on their position along the chain. Upstream firms, i.e. firms in the upper portion of a supply chain, should emphasize on emission rates and efficiency, with direct implications for material selection, process design and re-introducing flows from the reverse supply chain. In the middle portion of a supply chain, transportation and assembly efficiency are critical. Downstream firms, i.e. firms close to the customer, tend to stress recycling and packaging. At the same time, all parties should ideally consider the economic and environmental implications of their actions for the entire supply chain. A downstream firm will be immediately affected if an upstream supplier uses a material that is banned under the firm’s country legislation, which will require a new level of information exchange between supply chain partners beyond that related to inventory and logistics. Various terms (e.g. green supply) are used to characterize environmental aspects of supplier arrangements that implicitly or explicitly focus on improved environmental performance through better supplier management. Changes to reduce environmental impacts in the supply chain can focus on specific inputs (e.g. raw materials, energy sources etc), manufacturing processes or outputs (products, services and by-products). Major drivers of the supply chain, either forward or reverse, for which decisions are required, and which are the subjects of SCM, include production, inventory, location, transportation and information. The right combination of responsiveness and efficiency in each of these drivers allows a supply chain to increase throughput while simultaneously reducing inventory and operating expense (Hugos, 2006). In particular: •
Production refers to the capacity of a supply chain to make and store products in factories and warehouses. Typical decision making issues are what, how and when to produce.
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•
• •
•
Inventory includes everything, from raw material to work in process to finished goods, which are held by the manufacturers, distributors, and retailers in a supply chain. Here typical decision making issues are how much to make and how much to store. Location refers to the site of supply chain facilities and decision issues that arise refer to which activities are best to be performed in each facility. Transportation refers to the movement of raw material, intermediate and finished goods between different facilities in a supply chain. Typical decisions are how and when to move the materials involved in a supply chain. Finally, information is data transferred within a supply chain, between its links as well as between the supply chain and its environment. It is the basis for making the decisions mentioned above.
The above drivers have acquired a global character in recent years. In (Harland et al., 1999) a conceptualisation for supply strategy and an explanation for how organisations arrange and position themselves within modern economic environments in order to satisfy markets in the long and short terms are proposed. After an explanation of the global environment within which organisations must compete, it is pointed out, using references to previous research, that multi-domestic orientations should not be identified with globalization. A global orientation results in different business and plant strategies from those associated with a multi-domestic orientation, though international locations may be the same. Globalization is thus defined as a world-wide strategic vision that includes but extends beyond the facilities location decision, providing a strategic context for the future of operations, moving from an independently managed business, serving local markets, to networks of businesses serving chosen markets (Shi & Gregory, 1994), leading to the concept of extended enterprise. This concept, as pointed out in chapter 1, is the prevailing global industrial paradigm in modern business, encompassing SCM and including all stakeholders related to an enterprise. SCM constitutes a new reality in operations strategy, which came as a response of companies to the challenges of satisfying the demand of customers for high quality, low price products, supplied timely. Companies and other entities including manufacturers, distributors, retailers, and any other enterprises are forming supply chains, along which each link is the customer of some preceding one(s) and the supplier of some other entities (companies or individuals) next to it in the supply chain. SCM requires exchange of information and sharing the responsibility for the movement of goods between suppliers and end customers, through manufacturers, distributors and retailers. As noted above, along supply chains, operations that are typically performed include supply, production, stock keeping, transportation, distribution and customer service. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Tools providing support for finding effective solutions to SCM problems have been developed that are popular among SCM practitioners and have been proven to be successful in multiple environments. An example is the SCOR model, which defines a best practice as a current, structured, proven and repeatable method for making a positive impact on desired operational results (Poluha, 2007, Bolstorff & Rosenbaum, 2003). The SCOR model has been developed by the management consulting firms PRTM (www.prtm.com/) and AMR Research (www.amrresearch. com/) and has been endorsed by the Supply-Chain Council (https://www.supplychain.org/), a global, independent, non-profit organization for those specializing in SCM as the cross-industry diagnostic tool for SCM. SCOR enables users to address, improve, and communicate their practices within and between all interested parties in the extended enterprise. Supply chain OM trends and drivers, including the impact of emerging sustainable OM, during the last three decades (1980-2010) have been summarized by (Kleindorfer et al., 2005). It is pointed out that, as companies developed their core competencies and included them in their business processes, during 1980s, the tools and concepts of Total Quality Management (TQM) and Just In Time (JIT) were applied to developing new products and managing supply chains, and they typically involved multiple organizations. Generally, they first incorporated JIT between suppliers and production units. Then, during 1990s, companies moved to optimized logistics, including efficient consumer response (ECR) between producers and distributors. Subsequently, during 2000s, they moved to customer relationship management (CRM). Finally companies moved to global fulfillment architecture and risk management. Moving towards 2010 and beyond, the era of sustainable OM implies that lean operations pervade and permeate the entire life of the product, including the management of product recovery and reverse flows. Concluding this section, and before turning to the next, where the issue of supply chains and SCM vs. climate change will be addressed, a note on lean manufacturing (LM) and agile manufacturing (AM) should be made. LM is a production practice according to which any expenditure of resources that does not aim at the creation of value for the end customer should be considered wasteful and eliminated. AM is a practice according to which a production system is enabled to respond quickly to customer needs and market changes while controlling costs and quality. Characteristic of AM is the formation of virtual partnerships. Generally, the lean type of SCM is a typical example of effective management. As far as environment is concerned, an excellent integrating company guides other supply chain partners to be more environmentally-friendly. The other movement is strategic alliance to raise the utilization rate of various facilities and to be more efficient. By making the most of IT and direct sales, an agile supply chain can
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also reduce waste because of good prediction, thus contributing to environmental protection. White (2007) points out that LM has focused on waste reduction, but that predates the focus on environmental waste. Also, LM does not address one of the primary issues associated with going green: market pricing may not reflect resource consumption, externalities or scarcity. This, according to White, means that LM may not be green. Manufacturing processes might be inefficient (leading to excess production of CO2) or unrestrained by waste products (leading to more landfills). Also, energy is used by plant and equipment, and, as such, the efficient and optimal use of plant and equipment is another aspect to look at when it comes to carbon output as a constraint. AM, a leading production paradigm that gained momentum in the early 1990’s, is also important from the point of view of SCM. A comparison of the characteristics and objectives of SCM and AM and some case experiences are given in (Gunasekaran et al., 2008), where an integrated framework for a Responsive Supply Chain is proposed. The framework can be employed as a competitive strategy in a networked economy, in which customized products/services are produced with virtual organizations and exchanged using e-commerce. (Gunasekaran et al., 2008) notice that both AM and SCM appear to differ in philosophical emphasis, but each complements the other in objectives for improving organizational competitiveness. For example, AM relies more on strategic alliances/partnerships (virtual enterprise environment) to achieve speed and flexibility. But the issues of cost and the integration of suppliers and customers have not been given due consideration in AM. Thus, contrary to LM and to the SCM philosophy, which focuses on the integration of suppliers and customers with the help of information technologies and systems, AM can not play a leading role in guiding partners to be more environmentally friendly through integration in a supply chain. In order to choose among the above paradigms detailed analysis is required, which, of course, will take into account the particular characteristics of the industries concerned and the supply chains involved. It should be noted that AM may be considered as the next step after LM in the evolution of production methodologies, that they have common features, e.g. delivering value to the customer, being ready for change and valuing human knowledge and skills (Goldman et al., 1995), and that a combination of both is possible (leagile manufacturing). The preceding analysis that focused on key issues related to the concept of supply chain and related operations will hopefully prove helpful for the discussion regarding the relationship between key supply chain operations within different sectors and climate change, which is the subject of the following sections.
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CLIMATE CHANGE AND FIRMS: THE CARBON DISCLOSURE PROJECT As noticed in the introduction of this chapter, while supply chains contribute significantly to global warming, this in turn is the cause of phenomena, which may have impacts on supply chains that are often severe, as in the case of extreme weather events. Such impacts are felt along the whole set of supply chain activities, including manufacturing processes and, more generally, production plants. Vulnerability of plants and the production processes, in particular, in terms of infrastructure, personnel, communications, supply etc is largely dependent on location, to the extent that, in some cases, dislocation may be the only solution to the problems created by extreme events and other phenomena due to climate change like floods, sea level rise, storms, hurricanes etc. A valuable source of information regarding risks and opportunities due to climate change and the environmental performance of firms from different sectors of economy, including the manufacturing sector, is the Carbon Disclosure Project (www.cdproject.net) the largest investor coalition in the world. CDP provides annual information about the firms that participate in the coalition, covering four principal areas: • • • •
Management’s views on the risks and opportunities that climate change presents to the business; Greenhouse gas emissions accounting; Management’s strategy to reduce emissions/minimize risk and capitalize on opportunity; and Corporate governance with regard to climate change.
As far as climate change impacts in the manufacturing sector are concerned, in the latest CDP report (CDP6) for 2008, the sector appears to be faced with important risks and opportunities due to climate change. The sector covers a wide range of operations and products, spreading along automobiles, aerospace and defense, electricals and the manufacturing of large machinery and other industrial products. The manufacturing industry is subject to a wide range of regulation with regard to carbon emissions and there is likely to be more to come. For example, the automotive industry needs to keep abreast of changes in the regulatory landscape in areas such as fuel efficiency standards, environmental taxes and biofuels targets. Multi-jurisdictional operators who operate extensive global supply chains face a considerable challenge to stay informed of (and respond effectively to) changes in local conditions.
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The breadth of physical risks resulting from climate change, which have the potential to affect operations of the industry as a whole, is indicated in CDP6. Physical risks identified, with potential business impact, include temperature changes, flooding, increases in storm intensity and frequency, water shortages, spread of diseases and changes in local weather patterns. Within the industry, the automotive sub-sector appears to be exposed most to reputational risks. Given the general consensus that cars in their current form directly contribute to the atmospheric concentration of CO2, automotive manufacturers need to be seen taking action and providing solutions to address this. Consumers will then provide the company with an effective “license to operate”. Reputational risks have the potential to negatively impact a company’s own recruitment and retention. This, as pointed out in the report, is an important factor in an evolving marketplace: if manufacturers are to develop the technologies and products required to compete in a low-carbon world, then they must continue to be able to recruit and retain the necessary talent. A proportion of the sector already offers a range of environmental products, which help consumers reduce their carbon footprint. The other major risk identified by the industry is the rising prices of raw materials and energy. There is therefore an incentive to reduce energy usage. As the manufacturing sector landscape changes, with respect to legislation and customer behaviors, there will be both risk and opportunity, according to CDP6. New products and more “sustainable” versions of existing products may command a premium or prompt an increase in market share. The companies, which exploit these opportunities, particularly those around renewable energy and resource use minimization, are likely to generate new sources of revenue and enhance their brands. The strong competition, which has developed among automotive industries in recent years regarding the production of environment-friendly cars, is indicative. The CDP6 report, apart from the manufacturing sector, provides information about other sectors involved in material production. In particular, it refers to the Oil & Gas sector which, for the purposes of the analysis, is comprised of the Integrated Oil & Gas, Oil & Gas Exploration & Production, and Energy Equipment & Services subsectors, which include pure hydrocarbon exploration and recovery, refining and distribution of petroleum products and oilfield services. Like the manufacturing sector, the Oil and Gas sector is also faced with physical, market, regulatory and reputational risks. Examples of such risks include uncertainty over whether future carbon regulation will be aimed at the oil/gas producer or the end user of hydrocarbons, increasing costs of compliance and possible restrictions on growth, which is likely to impact upon profitability, and potential delays in obtaining environmental regulatory permits or other approvals slowing down upgrading of existing or construction of new facilities. Physical asset risks around climate change are also recognized. Hurricanes Katrina and Rita had a major effect on oil Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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production in the Gulf of Mexico in 2005, with total economic losses estimated at over $100bn in the form of foregone production volumes as well as direct response and repair costs. More generally, extreme weather events, whether offshore in the form of hurricanes and tsunamis or onshore in the form of tornadoes and flooding, are considered as the greatest physical threat, whether through disruption to operations or loss of physical property and the associated costs. CDP6 refers also to the Chemicals & Pharmaceuticals sector, which, for the purposes of the analysis, is comprised of the pharmaceuticals, specialty chemicals, biotechnology, commodity chemicals and diversified chemicals sub-sectors. While regulatory risks, existing or prospective, are identified, the primary legislative risk is the EU ETS and Kyoto Protocol. Rising energy prices as a result of regulatory changes are also identified as a source of risk. Firms within the sector are exposed to physical risks from climate change. This risk to operations is particularly noted amongst the companies with significant operations in areas sensitive to extreme weather events. Chemical companies dependent on organic raw materials or water treatment plants identify physical risks driven by increased temperatures and flooding, respectively. Equally, water scarcity is an issue for pharmaceuticals that are dependent on water for cooling purposes in production. Risks specific to the pharmaceuticals industry include the relationship between climate change and health and the increasing need for innovative pipeline drugs to meet the shift in disease focus and geographical presence of disease through changing climate patterns. Global warming could have a major effect on the world’s health. As pointed out in CDP6, it is currently impossible to predict the impact of a change in global weather patterns, but many scientists believe that global warming could bring diseases such as malaria, cholera, diphtheria and dengue fever to more temperate regions. Other medical problems could also emerge because of small rises in temperatures accelerating the proliferation of many common bacteria. Other sectors covered by CDP6 are the Construction and Building Products and Raw Materials, Mining, Paper and Packaging sectors. Again, regulatory as well as physical risks similar to the ones mentioned above are identified, and also some risks that are specific to the sectors. Opportunities are also mentioned. In chapter 7 a more detailed presentation of the CDP initiative will be made. Among others, issues such as the CDP methodology and major findings covering all sectors of economy and related to the Carbon Disclosure Leadership Index, the “Global 500”, etc, will be dealt with. There are multiple implications of the various supply chain processes in different environmental parameters, such as global warming, resource depletion, acidification, eutrophication, tropospheric ozone formation, ozone depletion, human toxicity, etc, which vary in intensity depending on the particular production sector considered. Such implications may be identified by using quantitative methods such as Life Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Cycle Assessment (LCA), which may be defined as the investigation and evaluation of the environmental impacts (damages) of a given product, service or process. The term ‘life cycle’ refers to the whole set of activities related to raw material production, manufacture, distribution, use and disposal, including all intervening transportation steps. The concept of life cycle can be used to optimize the environmental performance of a single product (ecodesign) or process or to optimize the environmental performance of a company. Categories of assessed damages include the ones referenced above resource depletion etc). LCA methodology consists of four steps: first, definition of a unit of analysis (the functional unit), definition of the boundaries of the system and scope definition of the study; second, performing a Life-Cycle Inventory of the inputs and outputs of the examined product system, where characterization and assessment of effects associated with the processes take place; third, conducting Impact Assessment, which includes classification, characterization and, optionally, normalization and weighting, and where inputs and outputs identified in the previous step are accounted in terms of environmental impacts; and, finally, interpretation of the results of the study, which includes a critical review of the previous steps. Relevant guidance and tools have been provided, among others, by SETAC (The Society of Environmental Toxicology and Chemistry, http://www.setac.org), CML (The Institute of Environmental Sciences, http://www.leidenuniv.nl/cml/ssp/index.html) and EPA (Environmental Protection Agency, http://www.epa.gov/NRMRL/lcaccess/index. html). The procedures of LCA are part of the ISO 14000 environmental management standards. Based on a survey of LCA practitioners carried out in 2006 (http:// faculty.washington.edu/cooperjs/Research/lca_survey.htm), most LCAs are carried out with dedicated software packages. 58% of respondents used GaBi Software, 31% used SimaPro, and 11% a series of other tools. According to the same survey, LCA is mostly used to support business strategy (18%) and R&D (18%), as input to product or process design (15%), in education (13%) and for labeling or product declarations (11%) (Cooper & Fava, 2006). One of the environmental impact categories most seriously affected by different supply chain processes is global warming. GHG releases into the environment are produced during manufacturing processes, whose by-products are CO2, as in the cases of power stations, cement kilns and other factories where fossil fuels (oil, natural gas, coal) are burnt. The same holds in the case where other GHGs are produced as by-products of manufacturing processes, particularly nitrous oxide and methane (e.g. when fossil fuels are used), and sulfur hexafluoride and perfluorochemicals (e.g. in aluminum smelting and semiconductor manufacturing).
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THE MANUFACTURING SECTOR Table 1 shows the CO2 emissions from U.S. Manufacturing by Industry and Industry Group in 2002, as classified (by numbers in parenthesis) according to NAICS (North American Industry Classification System). As seen in this Table, while the total CO2 emissions in that year equalled 1,401.2 million metric tones, four industries, namely petroleum, chemicals, primary metals and paper accounted for 2/3 of the total emissions (Schipper, 2006, Table 1, p. 4)). As noted above, the contribution of different sectors in global warming may be assessed using the various methods and techniques that have been proposed, such as LCA. An alternative approach is economic input-output LCA (EIOLCA). This method involves modelling all economic flows into and out of the system studied and then converting these flows into environmental impacts. The Green Design Initiative at Carnegie-Mellon University provides an on-line, commonly used, tool for EIOLCA (www.eiolca.net), which estimates the materials and energy resources required for, and the environmental emissions resulting from, activities in different sectors in the U.S. economy. The EIOLCA method was theorized and developed by economist Wassily Leontief in the 1970s based on his earlier input-output work from the 1930s. Results from using the EIOLCA tool provide guidance on the relative impacts of different types of products, materials, services, or industries with respect to resource use and emissions throughout the supply chain. For example, the effect of producing an automobile would include not only the impacts at the final assembly facility, but also the impact from mining metal ores, making electronic parts, forming windows, etc, that are needed for parts to build the car. Thus, using the EIOLCA tool, one can choose a certain sector from a drop-down menu of product types and obtain the total GWP (Global Warming Potential) associated with final sale of $1 million worth of that product type in metric tons of CO2-equivalent, which may be further broken down into CO2, N2O, and other GHG. The tool also provides similar results for conventional air pollutants, energy and toxic releases. Some examples showing the GHG releases per $1 million sales of different manufacturing sectors appear below (data as of March 23, 2009). In these Tables, the results are the total impacts, directly from the sector considered and its direct (first-tier) suppliers and indirectly from all other sector transactions further up the supply chain of the particular sector. Note that the data appearing in the subsequent Tables of this chapter refer to the US Department of Commerce 1997 Industry Benchmark (491) model. In particular, in the case of the Power Generation and Supply sector, the GHG releases per $1 million sales of that sector appear in the Appendix (Table 1). The Table shows that the total impacts, in terms of GWP, of $1 million sales of the output of the Power Generation and Supply sector, directly from the sector Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Climate Change and Supply Chain Operations 109
Table 1. CO2 emissions from U.S. Manufacturing by Industry and Industry Group in 2002 (units as noted) Industry and Industry Group (NAICS)
Petroleum (324) Petroleum Refineries (324110) Chemicals (325)
CO2 Emissions (Million Metric Tons)
Share of Total Manufacturing Emissions
[C]
% of [C] 304.8
21.8
277.6
19.8
311.0
22.2
Other Basic Organic Chemicals (325199)
80.5
5.7
Plastics Materials and Resins (325211)
63.3
4.5
Other Basic Inorganic Chemicals (325188)
23.9
1.7
Industrial Gases (325120)
17.0
1.2
Nitrogenous Fertilizers (325311)
12.4
0.9
Carbon Black (325182)
5.3
0.4
Cyclic Crudes and Intermediates (325192)
5.1
0.4
Noncellulosic Organic Fibers (325222)
5.0
0.4
Synthetic Rubber (325212)
3.5
0.2
Phosphatic Fertilizers (325312)
2.5
0.2
212.8
15.2
Primary Metals (331) Iron and Steel Mills (331111) Alumina and Aluminum (331300) Foundries (331500) Iron Foundries (331511) Nonferrous Metals, less Aluminum (331400) Electrometallurgical Ferroalloy (331112) Paper (322) Paper Mills, except Newsprint (322121) Paperboard Mills (322130) Food (311) Wet Corn Milling (311221)
126.0
9.0
48.0
3.4
17.9
1.3
10.2
0.7
10.8
0.8
3.1
0.2
102.4
7.3
44.4
3.2
31.8
2.3
94.7
6.8
18.9
1.3
Sugar (311310)
5.3
0.4
Fruit and Vegetable Canning (311421)
3.4
0.2
Nonmetallic Mineral Products (327)
91.1
6.5
Cement (327310)
39.0
2.8
Glass Products (327200)
16.2
1.2
Glass Containers (327213)
5.2
0.4
Flat Glass (327211)
4.0
0.3
10.3
0.7
Lime (327410)
continued on following page Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
110 Climate Change and Supply Chain Operations
Table 1. continued Industry and Industry Group (NAICS) Mineral Wool (327993) All Other Manufacturing Industries Total
CO2 Emissions (Million Metric Tons)
Share of Total Manufacturing Emissions
4.7
0.3
284.3
20.3
1,401.2
100.0
Source: Schipper, 2006
considered and its direct (first-tier) suppliers and indirectly from all other sector transactions further up its supply chain are 10,500 mt (metric tones) of CO2e. Put it in other words, the total CO2e emitted due to the production of $1 million of output from the Power Generation and Supply sector and all the economic transactions that occur between all sectors in the supply chain (direct and indirect), 10,500 mtCO2e is emitted. This is broken down into CO2 (10,000 mtCO2e), CH4 (376 mtCO2e), N2O (5,01 mtCO2e) and CFCs (123 mtCO2e). The sector contributing most to GPW within Power Generation and Supply is the sector itself. Indeed, the sector produces 9,910 mtCO2e, which corresponds to 94.38% of the total GHG releases of the sector and its suppliers. The Coal Mining sector, which produces 245 mtCO2e comes next, followed by the Pipeline transportation sector, producing 111 mtCO2e. Note that only the 10 sectors contributing most to the GWP of the Power Generation and Supply sector appear in the Table. As a second example, the GHG releases per $1 million sales of the Tire Manufacturing sector are shown in the Appendix, Table 2 (only the 10 sectors contributing most to the GWP of the sector appear in the Table). The total GHG impacts directly from the sector considered and its direct (first-tier) suppliers and indirectly from all other sector transactions further up its supply chain are 1,090 metric tones of CO2e. This is broken down into CO2 (940 mtCO2e), CH4 (84 mtCO2e), N2O (49,2 mtCO2e) and CFCs (15,9 mtCO2e). The sector contributing most to GPW is Power Generation and Supply, which produces 269 mtCO2e, corresponding to 24.68% of the total GHG releases of the sector and its suppliers. The Tire Manufacturing sector itself produces 173 mtCO2e, followed by Truck Transportation, producing 96.8 mtCO2e. In general, in almost all subsectors within the manufacturing sector, among the most important contributors to GHG releases from all other sector transactions further up their supply chain (direct and indirect suppliers), the Power Generation and Supply and the different Transportation sectors are included. In view of effects such as those mentioned above, obtained from the EIOLCA analysis, which document the serious contribution of the manufacturing processes to global warming, most companies take appropriate action. In particular, as noted in (White, 2007), product design is increasingly becoming more environmentally Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Climate Change and Supply Chain Operations 111
friendly through designs that reduce materiality (increasing recyclability) and waste, which reduces the need for landfills (methane). It is noted, however, that there is a need for product design to take more account of manufacturing efficiency and logistics. Some notions of industrial ecology that are taking hold in some countries will obligate manufacturers to be responsible for hazardous materials and resource consumption through the entire life cycle of the product, as opposed to the point at which the customer buys it. Other areas may also achieve improvements through better design. Thus, apart from product design, manufacturing processes are also identified as an area of company activities where improvements may also be achieved by using improved technology and management. Indeed, it is noted that, using the available technology, certain manufacturing processes cannot avoid the production of GHGs. However, through optimization of the way resources are used, manufacturing may increase yield and improve performance.
THE TRANSPORTATION SECTOR Transportation, like production, is one of the major contributors to the global warming effect. Indeed, transportation is part of the supply chain that is most scrutinized because it is through movement, at least in most modes of material transportation, fuels, particularly fossil fuels, get directly used and pollutants, including GHG, are released into the atmosphere. In other modes of transportation (e.g. liquids transported by means of pipelines) fuels are indirectly used, in direct (first-tier) and all other suppliers further up the supply chain (e.g. for pipeline construction). On the other hand, the effects of climate change on transport operations due to global warming are serious and may become severe. Indeed, extreme weather events may have very costly and even catastrophic implications in all kinds of material movement. A comprehensive list of climate change impacts on transport and corresponding actions required in order to cope with them is given in (Thomson, 2001). The Report presents the results of a study whose objective was to explore the implications of the potential impacts of climate change across the whole range of the policy and operational responsibilities of the UK Department of the Environment, Transport and the Regions (DETR) and its agencies (the Department was disbanded on May 29, 2002), and to advise on the next steps for taking forward consideration of the issues arising. Interviews were conducted with representatives of every DETR Directorate likely to be affected by climate change, exploring the extent to which the implications are beginning to be incorporated into forward planning. A selection of experts from a variety of sectors outside DETR was also consulted. The Department’s In House Policy Consultancy carried out the study between December 2000 and April 2001. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
112 Climate Change and Supply Chain Operations
The Report is particularly useful as it brings attention to a multitude of issues of concern related to transport in view of climate change, therefore it may be used as a reference for similar studies in other parts of the world. Indeed, issues raised per transport mode from the Report may have a broader application in other countries as well. In particular:
Railways Concerns may include impacts of extreme weather events on railways, such as delays leading to paying compensation to operators (and causing problems to customers), overhead cables brought down because of strong winds, problems related to coastal defences which may need to be strengthened, drainage issues, landslip resulting from heavier rainfall, securing stability of structures (bridges etc) as rising water tables affect soil stability, watering of tunnels, etc. Management of weather impacts on the railway infrastructure may require, among others, producing data on probabilities attached to future scenarios, developing clear guidance on building standards to reflect the probabilities, developing more joined-up approaches to drainage issues, promoting sharing of research and planning for climate change between the various transport modes etc.
Roads Concerns in the case of highways may include increased risks of flooding, requirements for improved highway drainage, deterioration of highway infrastructure (earthworks, bridges, pavements etc), need for changes in road safety and the management of landscape and biodiversity. Concerns in other cases of road transport arising from weather impacts at different authority levels may refer to drainage (design standards and maintenance, and also the cumulative effects on highways drains of urbanisation alongside roads involving increasing amounts of impermeable surface), effects of peak temperatures as well as black top melting (there has been some experience of motorway slabs jumping up in very hot weather), unstable embankments as a result of heavy rainfall, soil stability, risk of movement if water table rises too high, stability of bridges in cases they were built on soils that might start to move as a result of clay shrinkage or rising water table, implications for maintenance costs (need for rigorous programmes of inspection and increased drainage cleaning if heavier rainfall results in more loose soil being washed down) and funding issues.
Ports and Shipping Concerns here may refer to vulnerability of ports to extreme weather events, costs arising from ports being closed due to weather, implications of coastal erosion, sea Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Climate Change and Supply Chain Operations 113
level rise and increased storminess, dredging requirements, impacts of increased storminess on vulnerable shipping routes, and implications of new trade routes opening up as Arctic ice sheets melt (e.g. possible need for new port facilities). Requirements arising from such concerns may include providing climate predictions and accurate information about confidence limits, sorting out tensions between biodiversity policy and climate change, rationalising policy on coastal zone management and bringing the planning framework into alignment with it, developing overall transport strategy which takes account of relative environmental impacts of different modes (e.g. promoting coastal shipping as a means of tackling road congestion), overseeing standards for the safety of shipping in ports, appropriate ship design in the case of high speed ferry routes, providing safety information for shipping focused on immediate weather predictions etc.
Aviation Concerns may refer to physical infrastructure issues (thermal expansion of runways, effect of lower air density on payload and runway length, subsidence risks from clay shrinkage or rising water tables), intermodal interchange issues (airports access by road and rail), flood risks, impacts of climate change in requirement for de-icing etc.
Underground Main concern is the implications of rising groundwater, particularly safety and engineering risks associated with possible flooding, and other issues (e.g. impact on underground tunnels and foundations as the deep clays change in moisture content due to rising water tables).
Vehicles Demand for air-conditioning with consequent increases in fuel consumption and hence GHG emissions are an issue of concern. The CDP6 report, apart from the manufacturing and other production sectors that appeared in the previous section, refers also to the Transport & Logistics sector, which, for the purposes of the analysis, is comprised of two sub-sectors: air freight & logistics and surface transport. As pointed out in the report, the companies within the sample reported are essentially service businesses involved in the transport of goods and people. Capital lifetimes in the industry tend to be long and many elements of the value chain are likely to be outsourced. This in turn is likely to impact on the overall materiality of the climate change issue. Exposure to the physical risks of climate change is focused on the incidence of extreme weather events that would Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
114 Climate Change and Supply Chain Operations
impact transport distribution networks. Future regulation around carbon is considered to be a significant risk to the industry. General risks include increasing customer awareness of climate change issues and products impacts and an anticipated stepup in costs of raw materials, predominantly as a result of escalating energy prices. As far as the carbon footprint of transportation is concerned, the various transportation sectors (e.g. the Truck Transportation sector, the Rail Transportation sector, the Air Transportation sector etc) are characterized by different contribution in GHG releases. Awareness of each means of transportation’s likely impact on carbon output might change transportation modes and use (White, 2007). The current focus on transportation cost containment and reduction is also indirectly making companies look at ways to reduce their fuel bills and become more efficient and thereby emit less GHGs. In Tables 3 through 11 in the Appendix, data (as of March 23, 2009) about GHGs produced by such sectors appear. The Tables show the GHG releases directly from the sector considered and its direct (first-tier) suppliers and indirectly from all other sector transactions further up its supply chain (only the 10 sectors contributing most to the GWP of the sector appear in the Tables). The sectors are presented as defined by the NAICS system. The Tables in the Appendix show that, among the most important contributors to GHG releases from all other sector transactions further up the supply chain (direct and indirect suppliers) of almost the Transportation sectors, the Power Generation and Supply sector is the second major contributor (the Transportation sectors themselves are by far the major contributors within each sectors supply chain). For example, in the case of the Truck Transportation sector, where the GHG releases produced and contribution made to GWP, in metric tones of CO2 equivalent per $1 million sales, amount to 2,120 mtCO2e, the sector itself contributes with 1,770 mtCO2e, while the Power Generation and Supply sector is the second contributor with 86,1 mtCO2e. Note also that CO2 is by far the major GHG pollutant in all Transportation sectors. Thus, in the case of the Truck Transportation sector, from the total amount of the sector’s GHG releases (2,120 mtCO2e), an amount of 2,010 mtCO2e refers to CO2 releases. Only in the case of the Pipeline Transportation and the Postal Service sectors CH4 have an important contribution.
WAREHOUSING AND STORAGE Warehousing and storage are activities that typically appear in all supply chains, closely connected with distribution. They have their share in the global warming effect, either as direct or as indirect contributors. As noticed in (White, 2007) large quantities of product sitting idle in a warehouse might seem minimally polluting, but warehouses often take up valuable land and consume resources, even in a static Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Climate Change and Supply Chain Operations 115
state. They are large building footprints absorbing and reflecting heat, and facilities that consume large amounts of energy to operate and control climate. Also, warehouses can be sources of other pollutants because they often handle hazardous materials, and there is a trade-off between the marginal release of pollutants and the output handling of hazardous materials. Improving throughput, reducing the amount of idle inventory taking up space and more efficient use of space can have a significant impact on environmental issues associated with storage, although idle inventory and resources may actually be greener. Like manufacturing, warehousing and storage facilities are for the same reasons vulnerable to climate change. Vulnerability of these facilities affects, in particular, infrastructure, personnel, communications, supply etc and is largely dependent on location. They are exposed to similar risks, created by extreme events like floods, sea level rise, storms, hurricanes etc. Location is again a critical factor, to the extent that, in some cases, dislocation may be the only solution to the problems created as a result of climate change. Warehousing and storage activities are the ones classified as the NAICS Warehousing and Storage sector, which is comprised of one or more of the following NAICS subsectors: Warehousing and Storage: Industries in this subsector are primarily engaged in operating warehousing and storage facilities for general merchandise, refrigerated goods, and other warehouse products. They provide facilities to store goods and take responsibility for storing the goods and keeping them secure. They may also provide a range of services related to the distribution of goods, which can include labelling, breaking bulk, inventory control and management, light assembly, order entry and fulfilment, packaging, pick and pack, price marking and ticketing, and transportation arrangement. General Warehousing and Storage: This industry comprises establishments primarily engaged in operating merchandise warehousing and storage facilities. They generally handle goods in containers, such as boxes, barrels, and/or drums, using equipment, such as forklifts, pallets and racks. Refrigerated Warehousing and Storage: This industry comprises establishments primarily engaged in operating refrigerated warehousing and storage facilities. The services provided include blast freezing, tempering and modified atmosphere storage services. Farm Product Warehousing and Storage: This industry comprises establishments primarily engaged in operating bulk farm product warehousing and storage facilities (except refrigerated). Grain elevators primarily engaged in storage are included in this industry. Other Warehousing and Storage: This industry comprises establishments primarily engaged in operating warehousing and storage facilities except general merchandise, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
116 Climate Change and Supply Chain Operations
refrigerated, and farm product warehousing and storage (e.g. automobile dead storage, bulk petroleum storage, lumber storage terminals, etc). The GHGs produced by the Warehousing and Storage sector are shown in the Appendix (Table 12). The Table shows that, among the most important contributors to GHG releases from all other sector transactions further up the supply chain (direct and indirect suppliers) of the Warehousing and Storage sector, the Power Generation and Supply sector is again (as in the case of the Transportation sectors) the second major contributor (the Warehousing and Storage sector itself is by far the major contributor within the sector’s supply chain).Thus, while the GHG releases produced and contribution made by the sector’s supply chain to GWP, in metric tones of CO2 equivalent per $1 million sales, amount to 1,330 mtCO2e, the sector itself contributes with 852 mtCO2e, while the Power Generation and Supply sector is the second contributor with 324 mtCO2e. Again, CO2 is by far the major GHG pollutant in the Warehousing and Storage sector. Thus, from the total amount of the sector’s GHG releases (1,330 mtCO2e), an amount of 1,270 mtCO2e refers to CO2 releases.
TRADING Wholesale and retail trade, like all activities in a supply chain, is also exposed to risks created by global warming. Both wholesale and retail trade use infrastructure, equipment and processes, which are vulnerable to such risks. Trade is synonymous to supply, which, implies use of inventory facilities (buildings, material handling equipment etc), material movement and transport facilities and infrastructure (e.g. ports, highways, trucks, trains etc), personnel, communications, etc. All these may be hit by extreme weather events due to climate change. Within a supply chain, downstream firms, i.e. those that are close to the customer, include firms, most of which belong to the Wholesale and Retail Trade sectors. The Wholesale Trade sector, in particular, consists of firms that belong to a plethora of NAICS Wholesalers subsectors, like Automobile and Other Motor Vehicle, Motor Vehicle Supplies and New Parts, Tire and Tube, Furniture, Brick, Stone, and Related Construction Material, Office Equipment etc. Firms in these subsectors contribute also to the global warming effect. Table 13 in the Appendix shows their contribution. The contribution of the Retail Trade sector to global warming is similar and is shown in the Appendix (Table 14). Like the Wholesale Trade sector, this sector is comprised of firms belonging to a plethora of NAICS subsectors, such as New Car Dealers, Furniture Stores, Household Appliance Stores, Home Centers, Family Clothing Stores etc. Tables 13 and 14 in the Appendix show that, among the most important contributors to GHG releases from all other sector transactions further up the supply Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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chain (direct and indirect suppliers) of the Wholesale and Retail Trade sectors, the Power Generation and Supply sector is the major contributor followed by the sectors themselves.Thus, while the GHG releases produced and contribution made by the Wholesale Trade sector’s supply chain to GWP, in metric tones of CO2 equivalent per $1 million sales, amount to 279 mtCO2e, the Power Generation and Supply sector contributes with 96.3 mtCO2e followed by the sector itself, with a contribution of 74.2 mtCO2e. Also, in the case of the Retail Trade sector, while the GHG releases produced and contribution made by the sector’s supply chain to GWP, in metric tones of CO2 equivalent per $1 million sales, amount to 381 mtCO2e, the Power Generation and Supply sector contributes with 188 mtCO2e followed by the sector itself, with a contribution of 63.1 mtCO2e. Again, CO2 is by far the major GHG pollutant, in terms of mtCO2e produced, in both sectors’ supply chains.
CONSUMPTION AND CUSTOMER SERVICE The output of the supply chain reaches finally the consumer. The product is consumed, and everything around the consumption is wasted (White, 2007), with obvious impacts generally in the environment and, specifically, in global warming. Most typically, but not exclusively, what is wasted is the packaging around the consumer good or the set of materials and ancillary services supporting a commercial transaction between two enterprises. Packaging is often a lot more than just what is thrown away by the time a product is used. The role of product design, particularly design for reuse, is very important at that stage. Design should include all parts of the packaging process through the entire value chain. For products that are returned as faulty, for repair or for reuse, there is a growing recognition that Reverse Logistics should be part of the overall analysis of a carbon footprint. More generally, waste in all its forms, such as end-products, components, by-products or labor has serious impacts in the environment and, specifically, in global warming. Ineffective waste management incurs direct costs of removal and, indirectly, trading losses. Governments regulate about waste, including carbon emissions. The results obtained using the EIOLCA tool show that sectors related to the end links of supply chains, particularly consumption, also contribute to the global warming problem. Thus the Waste Management and Remediation Services sector, while one of its major roles is to remedy the problem of environmental pollution, is one of the sectors contributing seriously to GHG releases. The sector is closely related to the manufacturing processes and, more generally, to the supply chain operations. Not all of the NAICS subsectors that the Waste Management and Remediation Services sector is comprised of are literally manufacturing sectors. Actually, the sector is comprised of the following NAICS subsectors: Waste Collection, Solid Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
118 Climate Change and Supply Chain Operations
Waste Collection, Hazardous Waste Collection, Other Waste Collection, Waste Treatment and Disposal, Hazardous Waste Treatment and Disposal, Solid Waste Landfill, Solid Waste Combustors and Incinerators, Other Nonhazardous Waste Treatment and Disposal, Remediation Services, Materials Recovery Facilities, All Other Waste Management Services, Septic Tank and Related Services, and All Other Miscellaneous Waste Management Services. The GHG releases per $1 million sales of the above sector are shown in the Appendix, Table 15 (here again, only the 10 sectors contributing most to the GWP of the sector appear). The Table shows that the total GHG impacts of the Waste Management and Remediation Services sector (and its associated supply chain) are 7,310 metric tones of CO2e. This is broken down into CO2 (1,500 mtCO2e), CH4 (5,780 mtCO2e), N2O (16,9 mtCO2e) and CFCs (15,4 mtCO2e). The sector contributing most to the GWP of the Waste Management and Remediation Services sector is the sector itself, which produces 6,800 mtCO2e, corresponding to 93.02% of the total GHG releases of the sector (and its suppliers). Power Generation and Supply is second, producing 249 mtCO2e, followed by Oil and Gas Extraction, producing 41.8 mtCO2e. CH4 is by far the major GHG pollutant produced by the sector’s supply chain. Thus, from the total amount of the sector’s GHG releases (7,310 mtCO2e), an amount of 5,780 mtCO2e refers to CH4. CO2 releases follow, with 1,500 mtCO2e. More generally, recovery and reuse of materials, which are activities considered to be among those that contribute to the solution of the environmental problem our planet is faced with, also have serious impacts on several environmental impact categories, including GWP. This is shown, for example, in (Geyer & Jackson, 2004), where various options for reuse of steel (recovering steel sections through deconstruction and reusing them, or recovering steel via demolition and recycling it, or landfill) are compared in terms of life cycle cost and energy use. Also (Sathre & Gustavsson, 2006) show the global warming effects of various uses for recovered wood lumber (reuse as lumber, reprocessing as particleboard, pulping, and energy recovery). Customer service is connected with consumption, extending the life of products and assets, thus reducing the impacts of consumption in the environment. Customer service is integral part of supply chains. Products, parts and assets that are serviced are a major consideration for climate change, because resources continue to be used, consumed, stored and moved (White, 2007). Resource considerations may change assumptions about the relative value of product design and development (longerlived products vs. building replaceable and serviceable products). For example, lowcost resources and fuel would imply that a company might have chosen to invest in less durable equipment replaced more frequently. With resource considerations as a factor in decision making, the enterprise may opt for longer-lived equipment to reduce transportation of repair and replacement parts. Conversely, a company may Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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decide to invest more in repair capabilities than replacing entire pieces of equipment. Decisions such as these could have effects on transportation patterns and the overall size of the repair fleet.
THE ROLE OF INFORMATION TECHNOLOGY One important parameter affecting the relation between climate change and supply chain operations is Technology in its three dimensions, materials, production methods and management. Technology’s role in shaping this relation is obvious in all supply chain related sectors, from manufacturing to transportation and consumption. Technology, being the application of scientific achievements in production and, more generally, in the relationship between man and its environment, is of prime concern in product and process design. Indeed, decisions regarding materials selection, production methods to be used, and the organization of activities, always take Technology into account. This is also true in the case of supply chain design. Such decisions affect the environmental performance of supply chain operations in general, and specifically regarding the global warming effect, which may be ameliorated depending on the decisions taken. Information Technology (IT) led Technology during the whole period, from the end of the previous century through the beginning of the 21st century, characterized as the era of the “Third Wave” by futurists (Toffler, 1981). The role of IT for sustainable supply chain operations is decisive, indeed. This emerges, for example, from the latest S2 Innovation Review, covering the period from December 2007 to June 2008, where recent trends and developments that matter relating to IT and business innovation are reported. The review is published by S2 Intelligence to help the business strategist understand these trends (S2 Intelligence, 2008). The review starts by making reference to the possibilities of automating “green accounting”, i.e. carbon accounting in organizations. It is pointed out that carbon accounting in large organisations involves little automation beyond the use of spreadsheets, and considerable estimation, while the vast majority of this work has been conducted by the use of external auditors. It is argued that very large gaps exist in today’s frameworks for measuring and monitoring emissions, that IT will play a crucial role in replacing estimation with measurement, that the frequency, accuracy and detail of reporting will demand large investments in IT systems to support green accounting processes and that the enhancement of the role of IT will be required regardless of the timetable for any government reporting regulations, because of growing pressures from trading partners, customers, investors, and staff. Some interesting points on green accounting made in the review regarding supply chain operations are the following: Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
120 Climate Change and Supply Chain Operations
•
•
•
One area of ongoing contention will be the boundaries for where carbon calculations start and stop across service providers, outsourcing partners and supply chains. The need to account for green footprints across supply chains may arrive even earlier than expected, as European based manufacturers have already begun reporting their carbon footprint by individual product and business process in anticipation of trading partner requirements. Carbon labelling, which is starting to appear in business practices, will evolve, and there are indications that the cost to businesses of completing the required calculations will fall rapidly once organisations begin to systemize the process.
The S2 Innovation Review makes also specific reference to the roles for IT in sustainable business. It points out that, until 2008, the IT industry has concentrated its sustainability innovation on the important goal of reducing electricity use by computing facilities, especially through technologies that improve the capacity utilisation of all types of computing assets. However, the first half of 2008 saw awareness of other opportunities filtering into the broader business and IT communities. According to the review, highlights of the range of roles that may be played by IT in making business more sustainable, which are of particular importance to supply chains, include: •
•
• •
•
The extension of first generation carbon accounting solutions into all types of sustainability metrics (emissions, energy, water, other natural resources, packaging, waste, etc), and also into capturing and reporting sustainability metrics at business unit, process and product levels. Technologies for monitoring the status of forests, farmland, rivers and urban environments, including distributed sensor networks and associated services for aggregating and reporting the data. Visualisation technologies and services that make sustainability metrics visible - an essential step to change routines and practices. The extension of accounting, reporting and visualisation across supply chains, expecting carbon information to be gradually ‘connected’ across all types of trading partners via thousands of Web services and the display of carbon information on individual products and processes on websites to quickly progress to machine interfaces that can be automatically accessed by accounting systems of trading partners. Adoption and utilisation of all technologies, from video conferencing to online government portals and electronic banking, that directly reduce travel and other activities associated with high energy use.
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Climate Change and Supply Chain Operations 121
•
•
•
‘Smart energy’ technologies that optimise power generation and distribution systems, such as smart meters that empower individuals to act as change agents to help optimise complex systems. Embedded chips and power management software that will be used to make all types of appliances, buildings, automobiles and other devices smarter and more energy-efficient. Use of business analytics and data mining to identify new opportunities to improve energy efficiency and reduce waste in all types of business processes, software to improve day-to-day vehicle routing, and management of traffic and transportation grids, IT systems used to optimise fuel consumption by commercial aircraft extended to every form of transportation, implementation of solutions to help optimise fuel use by every corporate and government organisation that manages a fleet of vehicles, of any type.
DISCUSSION AND CONCLUSION The above discussion has been focused on the relationship between climate change and supply chain operations. Climate change, as a result of global warming due to human activities, and supply chain operations are mutually affected. Supply chain operations have carbon prints that contribute significantly to global warming. In turn, they are subjected to risks and opportunities due to climate change in the form of extreme events and other phenomena such as flooding or high winds, higher frequency of hot summers, desertification, sea level rise, hurricanes etc. Impacts of global warming, often severe, are felt along the whole set of supply chain activities. Physical structures and assets, the quality or quantity of inputs into production, the demand for products, utilities, services and equipment, which provide support to and carry out supply chain operations, are running risks as the Earth’s climate is changing. Impacts are felt in, among others, water availability or quality, health and safety of the workforce, work attendance or health care costs, demand for cooling in summer months, asset values, repair, redesign and/or relocation, the effectiveness or efficiency of production processes, the cost of operations and maintenance activities, product quality, operation of utilities, especially electricity generation, water supply, and sewerage, transport infrastructure, delivery of inputs and supplies etc. Several definitions of supply chains have been given. All of these definitions imply that supply chains are complex systems involving materials movement and transformation and transfer of associated information. Supply chains connect upstream suppliers of materials to the final consumer through a chain of operations (the value or demand chain), which involve a set of activities, from the acquisition of raw materials through their transformation and distribution to the delivery of Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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finished goods to the end consumer, including customer service, and also recovery of used products and packaging materials. Each link in the supply chain, while adding value to the product as it moves through the supply chain, contributes to environmental degradation, particularly climate degradation through GHG releases. An important link in the supply chain is production. Manufacturing and, more generally, production processes, are seriously affected by climate change. Production infrastructure, personnel, communications, supply, etc, are vulnerable to extreme events due to climate change. The manufacturing sector is faced with important risks. For example, the industry is subject to a wide range of regulation with regard to carbon emissions and there is likely to be more to come. Multi-jurisdictional operators who operate extensive global supply chains face a considerable challenge to stay informed of (and respond effectively to) changes in local conditions. The sector is also faced with physical risks, including temperature changes, flooding, increase in storm intensity and frequency, water shortages, spread of diseases and changes in local weather patterns. Another form of risk is the one related to reputation, considered to be an effective “license to operate” for the producer, provided by customers. Within the industry, the automotive sub-sector appears to be the most exposed to this kind of risk. Another major risk identified by the industry is the rising prices of raw materials and energy. There are also some opportunities presented by climate change to particular firms within the manufacturing sector. New products and more “sustainable” versions of existing products may command a premium or prompt an increase in market share. The companies, which exploit these opportunities, particularly those around renewable energy and resource use minimization, are likely to generate new sources of revenue and enhance their brands. Apart from the manufacturing sector, other sectors involved in material production are also presented with risks and opportunities. GHG releases into the environment are produced during manufacturing processes, particularly CO2 in cases where fossil fuels are burnt, but also other GHGs that are produced as by-products of manufacturing processes. In this chapter, the contribution in global warming of different sectors participating as links in supply chains has been assessed using the economic input-output LCA (EIOLCA), a method involving modelling all economic flows into and out of the system studied and then converting these flows into environmental impacts. Two examples (for the Power Generation and Supply sector and the Tire Manufacturing sector), showing the GHG releases per $1 million sales of different manufacturing sectors, appear in Tables, where the total impacts in terms of CO2e, directly from the sector considered and its direct (first-tier) suppliers and indirectly from all other sector transactions further up the supply chain of the particular sector, are provided. The total impacts are broken down into CO2, CH4, N2O and CFCs. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Next to manufacturing, this chapter has given specific attention to transportation which, like material production, is one of the major contributors to the global warming effect and, of course, one of the most important activities in any supply chain, particularly in the modern globalized economy. As noted, the effects of climate change on transport operations through extreme weather phenomena are serious and may become severe. Extreme weather events may have very costly and even catastrophic implications in all kinds of material movement. Impacts of such events may range, depending on the transport means and mode (railways, roads, ports and shipping, aviation, underground, vehicles etc), from costly delays, problems related to overhead cables, stability of structures and coastal defences, drainage issues, landslip and dewatering of tunnels (in the case of railways), to increased risks of flooding, requirements for improved highway drainage, deterioration of highway infrastructure, soil stability, stability of bridges and increased maintenance costs (in the case of roads). Transportation is possible by use of fuels, particularly fossil fuels, which release pollutants into the atmosphere, including GHGs, that lead to the global warming effect. As already noticed, in other modes of transportation (e.g. liquids transported by means of pipelines) fuels are indirectly used, in direct (first-tier) and all other suppliers further up the supply chain (e.g. for pipeline construction). The carbon footprint of transportation is dependent on the mode and transport means. GHGs produced by various transportation sectors (e.g. the Truck Transportation sector, the Rail Transportation sector, the Air Transportation sector etc) appear in Tables that show the GHG releases directly from the sectors considered and their direct (first-tier) suppliers and indirectly from all other sector transactions further up their supply chain. The Tables were produced using the EIOLCA tools, as in the case of production. Note that the results appearing in these Tables about GHGs produced per mode of transport are not comparable, as they show GHG releases per $1 million sales (referring to different products and respective prices). Warehousing and storage, and wholesale and retail trade, are important supply chain activities, which, like the activities already mentioned, are also exposed to risks created by global warming. Warehousing and storage are vulnerable to climate change risks created by floods, sea level rise, storms, hurricanes etc, which may affect infrastructure, personnel, communications, supply etc. Warehouses often take up valuable land and consume resources, even in a static state. They are large building footprints absorbing and reflecting heat, and facilities that consume large amounts of energy to operate and control climate. On the other hand, wholesale and retail trade is exposed to risks created by global warming, as they use infrastructure, equipment and processes that are vulnerable to such risks. Inventory infrastructure, supply, material handling, personnel, communications, etc, while possibly affected by extreme weather events contribute, directly or indirectly, to global warming. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Finally, consumption impacts on the environment and, specifically, in global warming, mainly by producing waste. Packaging, used consumer goods that are recovered, products that are returned as faulty, materials and ancillary services supporting commercial transactions etc contribute to the problem of global warming. Waste Management and Remediation Services, while one of its major roles is to remedy the problem of environmental pollution, is one of the sectors contributing seriously to GHG releases. Implications to firms involved include direct costs (e.g. for take-back activities, reprocessing of materials, remanufacturing etc) as well as indirect costs (e.g. trading losses or regulatory risks). Customer service, connected with consumption, as it extends the life of products and assets, reduces consumption’s impacts in the environment. On the other hand, as products, parts and assets that are serviced continue to be used, consumed, stored and moved, they are a major consideration for climate change. The chapter has been concluded with special reference to the role of Information Technology, considered to be a parameter affecting decisively the relation between climate change and supply chain operations. While several possibilities of automating “green accounting”, i.e. carbon accounting in organizations, are reported, highlights of a wide range of roles that may be played by IT in making business more sustainable, which are of particular importance to supply chains, have also been presented.
REFERENCES S2 Intelligence. (2008). S2 Innovation Review - 1H 2008. Retrieved December 3, 2008, from http://www.s2intelligence.com.au Bolstorff, B., & Rosenbaum, R. (2003). Supply Chain Excellence: A Handbook for Dramatic Improvement Using the SCOR Model. New York: American Management Association. Carnegie Mellon University Green Design Institute. (2008). Economic Input-Output Life Cycle Assessment (EIO-LCA), US 1997 Industry Benchmark model. Retrieved March 26, 2009, from http://www.eiolca.net Chopra, S., & Meindl, P. (2001). Supply Chain Management: Strategy, Planning, and Operations. New York: Prentice Hall. Christopher, M. (1992). Logistics and Supply Chain Management. London: Pitman. Cooper, J. S., & Fava, J. (2006). Life Cycle Assessment Practitioner Survey: Summary of Results. Journal of Industrial Ecology, 12–14.
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Corbett, C. J., & Klassen, R. D. (2006). Extending the Horizons: Environmental Excellence as Key to Improving Operations. Manufacturing and Service Operations Management, 8(1), 5–22. doi:10.1287/msom.1060.0095 Dekker, R., Fleischmann, M., Inderfurth, K., & Van Wassenhove, L. N. (Eds.). (2004). Reverse Logistics: Quantitative Models for Closed-Loop Supply Chains. Berlin: Springer. Flapper, S. D., van Nunen, J. A. E. E., & Van Wassenhove, L. N. (Eds.). (2005). Managing Closed-Loop Supply Chains. Berlin: Springer. doi:10.1007/b138818 Fleischmann, M., Beullens, P., Bloemhof-Ruwaard, J. M., & Van Wassenhove, L. N. (2001). The impact of product recovery on logistics network design. Production and Operations Management, 10(2), 156–173. doi:10.1111/j.1937-5956.2001.tb00076.x Fleischmann, M., Bloemhof-Ruwaard, J. M., Dekker, R., van der Laan, E., van Nunen, J. A. E. E., & Van Wassenhove, L. N. (1997). Quantitative models for reverse logistics: A review. European Journal of Operational Research, 103(1), 1–17. doi:10.1016/S0377-2217(97)00230-0 Ganeshan, R., & Harrison, T. P. (1995 May). An Introduction to Supply Chain Management. Journal of Systems Management, 16-21. Geyer, R., & Jackson, T. (2004). Supply Loops and Their Constraints: The Industrial Ecology of Recycling and Reuse. California Management Review, 46(2), 55–73. Goldman, L., Nagel, R. L., & Preiss, K. (1994). Agile Competitors and Virtual Organizations - Strategies for Enriching the Customer. Hoboken, NJ: John Wiley & Sons. Gunasekaran, A., Laib, K., & Cheng, T. C. E. (2008). Responsive supply chain: A competitive strategy in a networked economy. Omega, 36, 549–564. doi:10.1016/j. omega.2006.12.002 Handfield, R. B., & Nickols, E. L. Jr. (1999). Introduction to Supply Chain Management. Upper Saddle River, NJ: Prentice-Hall. Harland, C. M., Lamming, R. C., & Cousins, P. D. (1999). Developing the concept of supply strategy. International Journal of Operations & Production Management, 19(7), 650–673. doi:10.1108/01443579910278910 Hugos, M. (2006). Essentials of Supply Chain Management (2nd ed.). Hoboken, NJ: John Wiley & Sons. Kleindorfer, P. R., Kalyan, S., & Van Wassenhove, L. N. (2005). Sustainable Operations Management. Production and Operations Management, 14(4), 482–492. doi:10.1111/j.1937-5956.2005.tb00235.x Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Lambert, D. M., Stock, J. R., & Ellram, L. M. (1998). Fundamentals of Logistics Management. Boston: Irwin McGraw-Hill. Poluha, R. G. (2007) Application of the SCOR Model in Supply Chain Management. New York: Cambria Press. Retrieved March 25, 2009, from http://www.nist.gov/director/prog-ofc/report04-2.pdf Sathre, R., & Gustavsson, L. (2006). Energy and carbon balances of wood cascade chains. Resources, Conservation and Recycling, 47, 332–355. doi:10.1016/j. resconrec.2005.12.008 Schipper, M. (2006). Energy-Related Carbon Dioxide Emissions in U.S. Manufacturing. Retrieved March 26, 2009, from http://www.eia.doe.gov/oiaf/1605/ggrpt/ pdf/industry_mecs.pdf Shi, Y., & Gregory, M. J. (1994). International manufacturing strategy: structuring world-wide manufacturing network. Working Papers in Manufacturing, No. 11, Cambridge University. Stern Review. (2006). Stern Review on the Economics of Climate Change. HM Treasury, Cabinet Office. Retrieved December 3, 2008, from http://www.hm-treasury. gov.uk/stern_review_report.htm Strahan, B., & Van Bodegraven, A. (2004). Logistics vs. The Supply Chain - What Are We Fighting About? The Progress Group. Retrieved December 3, 2008, from http://www.theprogressgroup.com/publications/wp2_logs.html Sussman, F. G., & Freed, J. R. (2008). Adapting to climate Change: A Business Approach. Prepared for the Pew Center on Global Climate Change. Retrieved February 27, 2009, from http://www.pewclimate.org/docUploads/Business-Adaptation.pdf Thomson, S. (2001). The Impacts of Climate Change: Implications for DETR. Final Report. Annex E. In House Policy Consultancy. Retrieved March 25, 2009, from http:// www.defra.gov.uk/environment/climatechange/pubs/impacts/pdf/impacts-0105.pdf Toffler, A. (1981). The Third Wave. London: Pan Books. White, A. (2007). A New Wave of SCM Innovation Must Address Climate Change Concerns. Gartner, G00149710. Retrieved March 25, 2009, from http://www.carbonview.com/pdf/Gartner%20New%20Wave%20of%20SCM%20Innovation.pdf White, W. J., O’Connor, A. C., & Rowe, B. R. (2004). Economic Impact of Inadequate Infrastructure for Supply Chain Integration. Final Report. Washington, DC: U.S. Department of Commerce. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Chapter 5
Climate Change Adaptation Polices
INTRODUCTION In the previous chapters issues such as the role of the enterprise in a globalized world, extended enterprise, enterprise social responsibility and the role of supply chain management in view of sustainability requirements were introduced; basic facts about global warming and the impacts of climate change in human lives and the environment were presented; economic and social impacts of climate change for people around the world, developing and developed countries were outlined and climate change monetary costs were indicated; and relationships between climate change and key supply chain operations were discussed. This chapter focuses on key climate adaptation concepts and policies. It summarizes potential climate adaptation responses in the case of developed and developing DOI: 10.4018/978-1-61692-800-1.ch005 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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parts of the world, while the range of incentives or barriers that could encourage or prevent climate adaptation is explored. It also addresses the issue of the economic framework for climate adaptation. Adaptation refers, according to IPCC, to adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities. Various types of climate adaptation can be distinguished, including anticipatory and reactive, private and public, and autonomous and planned climate adaptation (IPCC, 2001). In contrast to mitigation, climate adaptation in most cases is undertaken by private actors (“autonomous”) and provides short or medium term local benefits. In addition, there may be intervention by public actors (“policy driven”) either by taking direct action, e.g. by implementing major infrastructure decisions, or by setting policies to encourage private intervention and provide information and advice to private actors. In both cases, it is possible that some interventions may have longer time effects, as shown in Table 1 (Stern Review, 2006, Table 18.1, p. 406). Climate adaptation aims at reducing vulnerability to climatic change and variability and, as a consequence, the negative impacts of climate change. It also aims, where possible, at enhancing the capability of taking advantage of opportunities offered by climate change. These may be the effect of actions at two broad levels (West and Gawith, 2005, p. 46): •
Building adaptive capacity, which involves creating the information and conditions (regulatory, institutional, managerial) that are needed before climate adaptation actions can be undertaken.
Table 1. Examples of climate adaptation in practice Type of response to climate change
Autonomous
Policy-driven
Short-run
• Making short-run adjustments, e.g. changing crop planting dates • Spreading the loss, e.g. pooling risk through insurance
• Developing greater understanding of climate risks, e.g. researching risks and carrying out a vulnerability assessment • Improving emergency response, e.g. early-warning systems
Long-run
• Investing in climate resilience if future effects relatively well understood and benefits easy to capture fully, e.g. localized irrigation on farms
• Investing to create or modify major infrastructure, e.g. larger reservoir storage, increased drainage capacity, higher seawalls • Avoiding the impacts, e.g. land use planning to restrict development in floodplains or in areas of increasing aridity.
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•
Delivering climate adaptation actions, which involves taking actions that will help to reduce vulnerability to climate risks, or to exploit opportunities.
Measures to build adaptive capacity range from understanding the potential impacts of climate change and the options for climate adaptation (i.e. undertaking impact studies and identifying vulnerabilities), to piloting specific actions and accumulating the resources necessary to implement actions. Examples of climate adaptation actions include planting different crops and altering the timing of crop planting, and investing in physical infrastructure to protect against specific climate risks, such as flood defenses or new reservoirs. Climate adaptation has a cost and delivers results within limits. As the Stern Review puts it (Stern Review, 2006, p. 405): “climate adaptation will reduce the negative impacts of climate change (and increase the positive impacts), but there will almost always be residual damage, often very large. The gross benefit of climate adaptation is the damage avoided. The net benefit of climate adaptation is the damage avoided, less the cost of climate adaptation. The residual cost of climate damage plus the cost of climate adaptation is the cost of climate change, after climate adaptation”. This analysis is depicted in Figure 1 (Stern Review, 2006, p. 405). Note that, for the sake of simplicity, the relationships between rising temperatures and the different costs of climate change/climate adaptation are shown as linear. In reality, the costs of climate change are likely to accelerate with increasing temperature, while the net benefit of climate adaptation is likely to fall relative to the cost of climate change.
KEY CLIMATE ADAPTATION CONCEPTS How far can climate adaptation reach as far as solving the problem of climate change is concerned? Which are its limits, constraints and costs? Is mitigation a sine qua non condition for the ultimate stabilization of the global climate? Chapter 18 of Part III of the Stern Review on the Economics of Climate Change, under the title “Understanding the Economics of Adaptation”, provides answers to such questions, outlining key climate adaptation concepts and setting out an economic framework for climate adaptation. In particular, the key messages of the Review are the following (Stern Review, 2006, p. 404): •
“Climate adaptation is crucial to deal with the unavoidable impacts of climate change to which the world is already committed. It will be especially important in developing countries that will be hit hardest and soonest by climate change”.
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Figure 1. Role of climate adaptation in reducing climate change damages. (Source: Stern Review, 2006)
Thus the Review, while recognizing the universal importance of climate adaptation, puts the emphasis on developing countries, which will be the first to suffer (and suffer most) as a result of climate change. This will be the result, among others, of lacking infrastructure, financial means, and access to public services that would otherwise help individuals adapt. •
“Climate adaptation can mute the impacts, but cannot by itself solve the problem of climate change. Climate adaptation will be important to limit the negative impacts of climate change. However, even with climate adaptation there will be residual costs. For example, if farmers switch to more climate resistant but lower yielding crops”.
The Review makes clear that, while climate adaptation may help abate the effects of climate change, it can not cope decisively with the problem. In fact, the source of the problem will not cease to exist because of climate adaptation measures. In addition, there will be lateral costs. •
“There are limits to what climate adaptation can achieve. As the magnitude and speed of unabated climate change increase, the relative effectiveness of climate adaptation will diminish. In natural systems, there are clear limits to the speed with which species and ecosystems can migrate or adjust. For human societies, there are also limits – for example, if sea level rise leaves some nation states uninhabitable”.
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Thus, while climate adaptation can not be a definitive solution to the problems created by climate change, it also has limits regarding its effectiveness in both natural systems and human societies. •
“Without strong and early mitigation, the physical limits to - and costs of climate adaptation will grow rapidly. This will be especially so in developing countries, and underlines the need to press ahead with mitigation”.
In other words, only mitigation may restrict the tendency for physical limits to get narrower and climate adaptation costs to increase, particularly in developing countries. Without strong and early mitigation, the limits and costs of climate adaptation will deteriorate rapidly, thus diminishing its efficiency to cope with the problems of climate change. •
“Climate adaptation will in most cases provide local benefits, realized without long lag times, in contrast to mitigation. Therefore some climate adaptation will occur autonomously, as individuals respond to market or environmental changes. Much will take place at the local level. Autonomous climate adaptation may also prove very costly for the poorest in society”.
The time and spatial scale of climate adaptation effectiveness is limited. In practice, climate adaptation will occur in response to particular climate events, whose effects are normally manifested locally and are time limited (for example, climate adaptation measures in order to prevent floods). In addition, climate adaptation is undertaken not only at a public level but also by individuals. In the latter case, climate adaptation for the poorest in society may prove very expensive. •
“But climate adaptation is complex and many constraints have to be overcome. Governments have a role to play in making climate adaptation happen, starting now, providing both policy guidelines and economic and institutional support to the private sector and civil society. Other aspects of climate adaptation, such as major infrastructure decisions, will require greater foresight and planning, while some, such as knowledge and technology, will be of global benefit”.
Climate adaptation not only has limits in what may be achieved. It is also a demanding endeavor, demanding not only strong public support in terms of guidance and public spending, but also foresight and effective planning. Besides, climate adaptation will occur in practice in the context of other socio-economic changes.
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•
“Studies in climate-sensitive sectors point to many climate adaptation options that will provide benefits in excess of cost. But quantitative information on the costs and benefits of economy-wide climate adaptation is currently limited”.
Thus, despite the existing multiple climate adaptation options for several climatesensitive sectors, specific knowledge about the exact costs and benefits expected is limited. As a result, there is usually substantial uncertainty regarding the net effect (benefit or cost). However, for some specific sectors, such as coastal defences and agriculture, some studies indicate that efficient climate adaptation could reduce climate damages substantially.
CLIMATE ADAPTATION IN THE DEVELOPED WORLD Chapter 19 of Part III of the Stern Review on the Economics of Climate Change, under the title “Adaptation in the developed world”, examines the barriers and constraints to climate adaptation in the case of developed countries and sets out how governments in the developed world can promote climate adaptation by providing information and a policy framework for individuals to respond to market signals. The key messages of the Stern Review in chapter 19 are the following (Stern Review, 2006, p. 416): •
“In developed countries, climate adaptation will be required to reduce the costs and disruption caused by climate change, particularly from extreme weather events like storms, floods and heat waves. Climate adaptation will also help take advantage of any opportunities, such as development of new crops or increased tourism potential. But at higher temperatures, the costs of climate adaptation will rise sharply and the residual damages remain large. The additional costs of making new infrastructure and buildings more resilient to climate change in OECD countries could range from $15 - 150 billion each year (0.05 - 0.5% of GDP), with higher costs possible with the prospect of higher temperatures in the future”.
An important point arising from this message is that the relation between climate adaptation and climate impact costs in developed countries will be function of the temperature rise. The net result (climate adaptation cost minus climate impact cost) is expected to be negative at low or medium temperature increases, i.e. climate adaptation will result in a net profit. Particularly in some sectors, such as in farming, in higher latitude regions significant benefits may be incurred from climate change for temperature rises not exceeding 2 – 3°C, should appropriate climate adaptation Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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practices be adopted. However, if the temperature increase due to climate change is higher, such a result cannot be ensured. Another point concerns the wide uncertainty range characterizing the additional costs of making new infrastructure and buildings more resilient to climate change. •
“Markets that respond to climate information will stimulate climate adaptation amongst individuals and firms. Risk-based insurance schemes, for example, provide strong signals about the size of climate risks and encourage better risk management”.
Market may provide an essential mechanism for company stimulation to develop climate adaptation strategies. The insurance sector, in particular, has an important role to play, as it is among the first to sensor the impacts of climate change, incorporating them to the insurance cost charged to insured companies, since this what it generally does by driving risk management through pricing risk, providing incentives to reduce risk, and imposing risk-related terms on policies (Kovacs, 2006; Lloyd’s of London, 2006). The same holds for the financial sector, which cannot ignore the risks associated with climate change when funding investments. •
“In developed countries, progress on climate adaptation is still at an early stage, even though market structures are well developed and the capacity to adapt is relatively high. Market forces alone are unlikely to deliver the full response necessary to deal with the serious risks from climate change”.
The lead-time between the realization of climate change risks and company responses to them may be attributed to the difficulties in recognizing signals related to climate change impacts, in evaluating the costs and benefits of alternative climate adaptation options, and in receiving feedback about the success or failure of these measures experienced by organizations (Berkout et al., 2006). It follows that public policy measures are needed to help private sector organizations overcome some of these obstacles, which is the next key message of the Stern report: •
“Government has a role in providing a clear policy framework to guide effective climate adaptation by individuals and firms in the medium and longer term. There are four key areas: ◦ High-quality climate information will help drive efficient markets. Improved regional climate predictions will be critical, particularly for rainfall and storm patterns.
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◦
◦
◦
Land-use planning and performance standards should encourage both private and public investment in buildings, long-lived capital and infrastructure to take account of climate change. Government can contribute through long-term policies for climatesensitive public goods, such as natural resources protection, coastal protection, and emergency preparedness. A financial safety net may be required to help the poorest in society who are most vulnerable and least able to afford protection (including insurance)”.
In this key message, the Stern report recognizes the role of governments in guiding private sector organizations through a clear policy framework and in providing aid particularly in four key areas: climate information and regional climate predictions, land-use planning and performance standards, long-term policies for climate-sensitive public goods and a financial safety net for the poorest in society. This, however, should not be interpreted as an underestimation of the need for governments to play the major role in developing and implementing climate adaptation strategies and measures. The above key messages of the Stern Review have a global reference. More specifically, they generally refer to adaptation in the developed world. Another study, focused on one of the developed countries (UK) and addressing directly businesses, investors and the financial markets, is the one reported by Acclimatise and UKCIP (Firth & Colley, 2006). The report provides a concise explanation of the scale of the climate adaptation agenda and the implications for business and establishes a milestone against which future actions will be measured by investors, employees, customers and communities. The report characterizes the implications for businesses, and to their investors, customers and workforce, through failure to assess and manage climate risks as significant and lists them as follows (Firth & Colley, 2006, p. 2): •
• • •
“Value, return and growth will reach a tipping-point when an increasing awareness and understanding of the realities of climate change challenges previous expectations. Decisions taken by directors and professional advisers may be open to legal challenge. The tipping points on value, return and growth are likely to trigger credit rating revisions and increases in the costs of capital. Customer expectations, preferences and needs will change as the impacts of climate change become apparent.
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•
Governments are likely to resort to prescriptive regulation if businesses do not respond with adaptive action”.
The report presents the key findings after analyzing the responses of businesses in the UK FTSE 350 to the Carbon Disclosure Project (CDP, 2009). CDP, which has launched in December 2000, provides a coordinating secretariat for institutional investor collaboration regarding climate change and aims to inform investors regarding the significant risks and opportunities presented by climate change. It also aims to inform company management regarding the serious concerns of shareholders about the impact of these issues on company value (a more detailed presentation of CDP, applied to the Global 500, the FTSE Global Equity Index Series, appears in chapter 7). The UK FTSE Index Series (UK FTSE, 2009) is designed to represent the performance of UK companies, providing investors with a comprehensive and complementary set of indices that measure the performance of all capital and industry segments of the UK equity market. In particular, the UK FTSE 350 Indices (Supersector Indices) provide investors with a view of one of the world’s most important markets. It includes the 18 highly tradable real-time sector indices that are derived from the blue chip companies in the FTSE 100 (comprising the 100 most highly capitalized blue chip companies, representing approximately 81% of the UK market) and FTSE 250 (comprising mid-capitalized companies, not covered by the FTSE 100 and representing approximately 15% of UK market capitalization) indices. The findings of the Acclimatise and UKCIP report, referring to business understanding of the need for climate adaptation, are summarized as follows (Firth & Colley, 2006, p. 2): •
• • •
• •
“Despite an increasing realization of climate risks, this is not reflected in the risk management strategies of the majority of the FTSE 350. Only 10% of the FTSE 100 reported that they considered the impacts of climate change pose a high risk to their business operations. Climate adaptation is not as well understood as mitigation. The number of good responses, with a rich description of climate risks, is low. Within some sectors, there are a small number of companies that have demonstrated an understanding of climate risks. These companies are setting the pace and will become the benchmarks. This contrasts markedly with other companies in the same sectors appearing not to recognize that they face any climate risks. Although the potential direct impacts of extreme events are recognized, there is less appreciation of the impacts, both direct and indirect, arising from changes in longer-term average conditions and seasonal variation in temperature, precipitation etc”.
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In addition to analyzing the climate adaptation results from the CDP4 survey, i.e. the survey based on the fourth CDP information request, the Acclimatise-UKCIP report provides a primer for directors, investors, fund managers and their professional advisers on the climate adaptation agenda and the need for action (Firth & Colley, 2006, p. 2): • •
•
•
•
“Businesses can respond to build resilience and climate-proof their interests. Uncertainty about the future is not a reason for inaction. There is sufficient information to enable the impacts of a changing climate over the next 40 years to be embedded in decision-making at strategic and project levels. Adaptive management is feasible. Changing markets, customer needs and investor expectations will present significant opportunities for those companies that take action to climate-proof their businesses. Taking adaptive action early may be cost-effective when compared with the costs associated with remedial action at a later date. When analyzing potential action, companies should consider their fiduciary responsibilities. Businesses should review their climate risk management strategies and check that they are responding to both the mitigation and the climate adaptation agendas. Action is required on both - now”.
Finally, the report provides sector summaries where the likely risks per sector are highlighted and the potential scale of the impacts if businesses fail to take account of climate change as a business risk are demonstrated. For example, in the case of the chemicals sector, where one third of CDP4 respondents expressed high concern about their exposure to climate risks, the report makes the following points (Firth & Colley, 2006, p. 13): •
•
“Rising ambient air temperatures, variations in water quality, and the availability of cooling water will all have an effect on chemical processes. These must be considered thoroughly, as they will have knock-on impacts across all activities in this sector. Low river flows during hot, dry summers can lead to restrictions on water abstractions, with consequences for cooling processes when the need for cooling is highest. Low flows also mean restrictions on the volume of high temperature water that companies are allowed to discharge to rivers and streams, with impacts on production. Finally, low river flows are less able to dilute pollutants, leading to tightened restrictions on effluent discharge.
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• •
•
•
Changes to chemical processes, particularly under extremes of high temperature, will affect process operations and corrosion rates. Volatile chemical storage procedures will need to take account of rising temperatures and the impacts on tank pressure. The stability and performance of some chemical formulations are temperature dependent. Vulnerability of supply chains may lead to an increased disruption to supply. This may mean that providing additional materials storage capacity may be desirable to provide greater resilience. There are considerable regulatory risks to consider, as handling, transmission and storage safety standards may be compromized”.
In the already mentioned report (West and Gawith, 2005), published under the title “Measuring Progress: Preparing for Climate Change through the U.K. Climate Impacts Programme” interesting examples of climate adaptation policies in a developed country (the UK) are given. The report integrates findings from studies conducted under the UK Climate Impacts Programme (UKCIP) to help develop a national picture of the impacts of climate change and emerging climate adaptation options. After scoping the impacts of climate change, the report addresses the issues of quantifying the risks, costs and opportunities of climate change and adapting to climate risks. Finally the report arrives at lessons learnt and sets priorities for the future. In particular, among others, quantified impacts from completed UKCIP studies per sector/activity (e.g. water resources, flood management, etc) are ranked as positive, negative, uncertain and mixed. Also case examples of building adaptive capacity as well as case examples of delivering climate adaptation actions are provided in the report. The questions “Why have many organizations not (yet) delivered climate adaptation actions?”, “What main problems do organizations encounter in seeking to adapt to climate change?”, and “What main opportunities encourage organizations to adapt to climate change?” are addressed. Finally, interesting points are made regarding lessons learnt from passed experience and priorities to be set. In another study (London Climate Change Partnership, 2006), lessons regarding climate adaptation for one of the biggest Metropolis of the developed world (London) are drawn from policies and measures adopted in other big cities of the world. These lessons concern particularly flood risk management, heat risks and water resources. The study reviews several case studies concerning these cities and it points out that, while there are specific lessons to be learnt in London from each case study, there are also some common threads (London Climate Change Partnership, 2006, p. 11): •
There is a need for city-wide planning.
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• •
• •
• •
There is a need for partnerships between different organizations, and across geographic boundaries. Climate change climate adaptation needs to be considered in short, medium and long-term decision-making, recognising the interaction between different measures. Holistic, integrate thinking is required to manage climate risks most effectively – for instance, water harvesting measures can also help to manage flood risks. Retrofit of climate adaptation measures to existing buildings, infrastructure and systems presents an enormous challenge for London and mechanisms to do so need to be implemented immediately. The opportunities for “climate-proofing” new development are easier to realize, and must be driven through the planning process. There is a need for clear communication and engagement with authorities, business and the public to achieve successful preparedness for changing climate risks”.
Several other projects and studies concerning climate adaptation in developed countries have or are being conducted in addition to the ones considered in this section. Notable among these projects is the ADAM project (ADAM, 2009). Funded by the European Commission and co-ordinated by the Tyndall Centre for Climate Change Research in the UK, ADAM (Adaptation and Mitigation Strategies: supporting European climate policy) is an integrated research project running from 2006 to 2009 that will lead to a better understanding of the trade-offs and conflicts that exist between climate adaptation and mitigation policies. ADAM will support EU policy development in the next stage of the development of the Kyoto Protocol and will inform the emergence of new climate adaptation strategies for Europe. Having the UN Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol as the primary international policy context for the work to be undertaken, ADAM will examine the extent to which existing policy trajectories in Europe will deliver Europe’s commitments to these agreements and will co-develop with stakeholders portfolios of policy options where current trajectories are insufficient. Among several deliverables is D-P2.4 “An appraisal of EU climate policies” (note that the project addresses both climate adaptation and mitigation strategies).
CLIMATE ADAPTATION IN DEVELOPING COUNTRIES Adaptation to climate change in developing countries is a priority for ensuring poverty eradication and sustainable development in the long run. As pointed out in (Sperling, 2003, p. X), “ many sectors providing basic livelihood services to the poor Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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in developing countries are not able to cope even with today’s climate variability and stresses. Over 96% of disaster-related deaths in recent years have taken place in developing countries. Often, extreme weather events set back the development process for decades. With fishing grounds depleting, and droughts, floods, and storms destroying entire annual harvests in affected areas, the El Niño phenomenon serves as a prime example of how climatic variability already affects vulnerable countries and people today. In many developing countries, climate change already increases stresses from climate variability and extremes and will do so increasingly in the future”. Chapter 20 of Part V (Policy Responses for Climate adaptation) of the Stern Review on the Economics of Climate Change (Stern Review, 2006), under the title “Adaptation in the developing world”, explores the particular issue of how developing countries can adapt to climate change. Developing countries lack the infrastructure, financial means, and access to public services that would otherwise help them adapt. As a result, the impacts of climate change will be severe in terms of loss of life, adverse effect on income and growth, and damage to living standards generally. The chapter shows, among others, the importance of support from the international community, and the need for investment in global public goods such as the development of resistant crops. The key messages of the Stern Review in chapter 20 are the following (Stern Review, 2006, p. 430): • •
•
•
•
“Adaptation to mute the impact of climate change will be essential in the poorer parts of the world. The poorest countries will be especially hard hit by climate change, with millions potentially pushed deeper into poverty. Development itself is key to climate adaptation. Much climate adaptation should be an extension of good development practice and reduce vulnerability by: ◦ Promoting growth and diversification of economic activity; ◦ Investing in health and education; ◦ Enhancing resilience to disasters and improving disaster management; ◦ Promoting risk-pooling, including social safety nets for the poorest. Putting the right policy frameworks in place will encourage and facilitate effective climate adaptation by households, communities and firms. Poverty and development constraints will present obstacles to climate adaptation but focused development policies can reduce these obstacles. Climate adaptation actions should be integrated into development policy and planning at every level. This will incur incremental climate adaptation costs relative to plans that ignore climate change. But ignoring climate change is not a viable option - inaction will be far more costly than climate adaptation. Climate adaptation costs are hard to estimate, because of uncertainty about the precise impacts of climate change and its multiple effects. But they are
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•
likely to run into tens of billions of dollars. This makes it still more important for developed countries to honor both their existing commitments to increase aid sharply and help the world’s poorest countries adapt to climate change. More work is needed to determine the costs of climate adaptation. Without global action to mitigate climate change, both the impacts and climate adaptation costs will be much larger, and so will be the need for richer countries to help the poorer and most exposed countries. The costs of climate change can be reduced through both climate adaptation and mitigation, but climate adaptation is the only way to cope with impacts of climate change over the next few decades”.
It follows that climate adaptation in developing countries has some characteristics quite distinct compared with those of climate adaptation in developed countries. These concern, first, the strength of the impacts of climate change on developing countries, which are exposed to more frequent and intense extreme weather events; second, the limits to autonomous climate adaptation, as a result of low incomes and poverty; third, the key character of development policies, which should be combined with climate adaptation; and fourth, the need for support, particularly financial, to developing countries by the developed ones. Apart from such distinct characteristics, climate adaptation in both developed and developing countries raises similar issues (e.g., the imperative role of mitigation, the uncertainty regarding the impacts of climate change and the cost of climate adaptation policies that need to be implemented etc). Climate adaptation practices in different developing countries may differ depending on the particular character of climate change threats and extreme weather events, the region, existing infrastructure etc. There are several examples of such practices. For example, in Bangladesh, which has been identified as the “most disaster-prone” of all countries, substantial investments have been made in order to reduce vulnerability to extreme climate variability including a structural change in agriculture, with an increase in the planting of much lower risk dry season irrigated rice; better internal market integration; and increased private food imports. Bangladesh’s dependence on agriculture has also been reduced by an increase in export-oriented garment manufacturing. These developments were aided by higher credit penetration, including micro credit, increased remittances from abroad, and increased donor assistance. General development support has contributed to reducing the economy’s sensitivity to extreme climate variability (Overseas Development Institute, 2005). Climate adaptation efforts and, more generally, building the resilience of countries, communities, and households to all types of shocks in developing countries may
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be strengthened by making progress in specific directions. These include progress in the following (based on (Sperling, 2003): •
• •
• •
• •
•
•
Improved governance, including an active civil society and open, transparent, and accountable policy and decision making processes, which can have a critical bearing on the way in which policies and institutions respond to the impact of climatic factors on the poor. First steps towards mainstreaming climate issues into all national, sub-national, and sectoral planning processes. Encouraging a ministry with a broad mandate, such as planning or finance, to be fully involved in mainstreaming climate adaptation, especially in countries where major climate impacts are expected. Combining approaches at the government and institutional level with bottomup approaches rooted in regional, national, and local knowledge. Empowerment of communities so that they can participate in assessments and feed in their knowledge to provide useful climate-poverty information and have full access to climate relevant information systems. Vulnerability assessments that fully address the different shades and causes of poverty. Access to good quality information about the impacts of climate change, which is key for effective poverty reduction strategies, including early warning systems and information distribution systems that help to anticipate and prevent disasters. Integration of impacts into macroeconomic projections so that resources, instead of being directed into disaster relief and recovery activities, support long-term development priorities through the national budget process. Increasing the resilience of livelihoods and infrastructure as a key component of an effective poverty reduction strategy. Similarly, effective climate adaptation strategies should build upon, and sustain, existing livelihoods and thus take into account existing knowledge and coping strategies of the poor. Traditional risk sharing mechanisms, such as asset pooling and kinship, could be complemented by micro-insurance approaches, and infrastructure design and investment, both for private and public use, should take into account the potential impacts of climate change.
It is obvious from the above that climate adaptation in developing countries is inseparable from development planning. In particular, the need to mainstream climate adaptation into development planning and ongoing sectoral decision-making is, indeed, increasingly recognized, and several bilateral and multilateral development agencies are starting to take an interest (Klein et al., 2007). Several development Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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agencies, including the World Bank (www.worldbank.org/), the Organization for Economic Co-operation and Development (OECD) (www.oecd.org/) and the German Technical Co-operation Agency (www.gtz.de/), have screened their project portfolios. What is meant by portfolio screening is the systematic examination of an agency’s set of policies, programmes or projects, with the aim of identifying how concerns about climate change can be combined with an agency’s development priorities, such as poverty reduction, institutional development and capacity building. The objectives of such screening have been to ascertain the extent to which existing development projects already consider climate risks or address vulnerability to climate variability and change, and to identify opportunities for incorporating climate change explicitly into future projects. It has been shown that most agencies already consider climate change as a real but uncertain threat to future development, but they have given less thought to how different development patterns might affect vulnerability to climate change. The need to take a comprehensive approach to climate adaptation and its integration into development planning and sectoral decision-making has also been shown, and a number of policy initiatives have been taken to promote such an integration. Practical tools have been developed by a number of agencies in an effort to analyse opportunities for integrating climate change adaptation into their activities (Burton & Van Aalst, 2004; DFID, 2006; Ministry of Foreign Affairs of Denmark, 2005). Making progress in the directions mentioned earlier and, more generally, integrating climate adaptation into development planning and ongoing sectoral decision-making is, of course, a political issue, that is, an issue of power relations, where power is understood as a relational effect of social interaction (Allen, 2003), including violence or the threat of violence (Ellis & Ter Haar, 2004). For example, it is argued (Eriksen & Lind, 2008) that people’s adjustments to multiple shocks and changes, such as conflict and drought, which are among impacts that commonly appear in developing countries as a result of climate change, are intrinsically political processes that have uneven outcomes. Thus, based on fieldwork in two areas in Kenya, it has been found that, in the face of drought and conflict: •
•
Relations are formed among individuals, politicians, customary institutions, and government administration aimed at retaining or strengthening power bases in addition to securing material means of survival. National economic and political structures and processes affect local adaptive capacity in fundamental ways, such as through the unequal allocation of resources across regions, development policy biased against pastoralism, and competition for elected political positions.
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• •
Conflict is part and parcel of the climate adaptation process, not just an external factor inhibiting local climate adaptation strategies. There are relative winners and losers of climate adaptation, but whether or not local adjustments to drought and conflict compound existing inequalities depends on power relations at multiple geographic scales that shape how conflicting interests are negotiated locally.
It is concluded that climate change adaptation policies are unlikely to be successful unless the political dimensions of local climate adaptation are considered. Existing power structures and conflicts of interests represent political obstacles to developing such policies. It is is often too difficult or practically impossible for minimization of inequity to act as a criterion for decision making. Water scarcity is a characteristic example: in developing countries, public water services are often provided to companies or main urban centres inhabited by better-off consumers rather than to poorer communities. As water becomes scarce due to climate change, competition for limited resources favours the former rather than the latter, as companies and urban centres have greater political power.
COMPANY CLIMATE ADAPTATION This paragraph focuses on the issue of how the individual business unit is affected by and may cope with climate change (this very important issue will be revisited in chapter 7, devoted to business responses to climate change, where many examples of specific company practices will be presented). From the preceding discussion it has been obvious that, along with the rest of the economy and society at local, regional or national levels, individual companies in the private sector are and will be more in the future significantly affected by climate change. Indeed, companies within sectors like transport, construction, manufacturing, retail, insurance and the utilities have already been seriously affected during extreme weather events connected with climate change. In fact impacts of climate change will be felt by every business irrespective of their size, location, markets, products and services, and will affect natural resources and raw materials, supply chains and logistics, fixed asset design and construction, asset operation, performance and maintenance, processes, asset values, markets, products and services, and workforces (Firth & Colley, 2006). In general, companies are exposed to risks because of climate change, but they may also be presented with opportunities. These risks and opportunities may have significant financial implications and affect the performance of investors’ portfolios. Companies are exposed to different kind of risks including (IIGCC, 2006, pp. 10-11): Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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•
•
• •
•
Physical risks. Companies may be affected by the weather-related impacts of climate change as a result of droughts, floods, storms and rising sea levels as well as the unpredictability of weather which may hit several sectors, particularly agriculture, forestry, fisheries, health care, insurance, tourism, water and property. Competitiveness risks. Companies may lose competitive advantage, e.g. by not acting proactively, as in the case of developing new technologies or products to meet likely changes in demand as a result of climate change. Legal (litigation) risks. Companies could potentially be held liable for damages associated with the physical effects of climate change. Brand and reputational risks. Such risks may arise as a result of companies being viewed negatively by consumers, staff, suppliers and shareholders due to the company’s actions on greenhouse gas emissions and responses to climate change. Policy (regulatory) risks. Companies may be affected by government policies to internalize the cost of carbon, although the specific financial impacts will depend on the scale of emissions from their own facilities, indirect emissions in the supply chain and emissions embedded in their products.
On the other hand, companies may be presented with opportunities as a result of climate change and benefit from new investment options. Examples include renewable energy production systems (wind, hydro, solar and biofuel production systems), alternative farming, tourism and emissions trading. An interesting approach to the issue of assessing and managing climate risks is adopted by a recent study published by the Pew Center on Global Climate change (Sussman & Freed, 2008). The study, which is not restricted to one of the developed countries of the world, such as the Acclimatise-UKCIP one, was published after the latest IPCC Report (IPCC, 2007) and outlines a sensible business approach to analyzing and adapting to the physical risks of climate change. It focuses on a critical first step in assessing these climate impacts: understanding the potential risks to business and the importance of taking action to mitigate those risks. While it is noted that not all businesses need to take action now, the study develops a qualitative screening process to assess whether a business is likely to be vulnerable to the physical risks associated with climate change, and whether a more detailed risk assessment is warranted. More specifically, the study begins by offering context on the broader risks and opportunities presented by climate change and continues with a summary of possible business actions to adapt to the physical effects of climate change, and of the pathways by which climate can affect business. The screening process, that businesses can use to assess whether they are likely to be vulnerable to the physical risks associated with climate change, is described. If the screening Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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indicates that climate change may pose a significant risk, a business can decide whether to undertake a more detailed financial risk assessment, and then, if indicated, take action. Finally, the study presents case studies of three companies that have begun to look at climate risks and points out the very different circumstances that motivated each company, and how the companies may be moving towards different conclusions about the appropriate response to the changing climate. Particularly interesting is the part of the study devoted to the “screening process” mentioned above. The purpose of the screening is to determine whether the business might be at risk, what aspects are at risk and from what, and whether a more complete risk assessment is needed to determine exactly what, if any, actions are needed. The goal of the screening is to classify/screen risks into one of three categories: assess now, wait and study, and take no action. Screening to identify whether climate change is a potentially important factor in current decision making involves the following steps: identifying sensitivities, identifying the types of decisions susceptible to climate change, and evaluating the magnitude of what is at risk (Figure 2). Three questions are raised during this process: 1. 2. 3.
Is climate important to business risk? Is there an immediate threat? Or are long-term assets, investments, or decisions being locked into place? Is a high value at stake if a wrong decision is made?
As indicated in Figure 2, three possible outcomes (categories) may result from the screening process (Sussman & Freed, 2008, p. 16): Figure 2. Screening for climate risks. (Source: Sussman & Freed, 2008)
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• • •
Category 1- potential significant climate risk that may need to be managed in the short term. Category 2 - potential climate threats that need to be monitored and reassessed over time. Category 3 -climate risks do not appear significant, thus no further analysis is required.
Company climate adaptation, in order to be successful, requires that companies are able to embed climate change considerations within company decision making practices, recognize opportunities and threats, identify appropriate options for action, and act accordingly in time. In general, the process of climate adaptation is a process of behavioural change, where organizations learn from direct experience as well as from others, and develop conceptual frameworks for interpreting that experience (Levitt & March, 1988). Key parameters in organizational learning include (Berkout et al., 2006, pp. 5-6): •
•
• •
•
•
Routines, i.e. the means (rules, procedures, strategies, technologies, conventions, cultures and beliefs), by which organizations carry out activities by matching appropriate procedures that are selected as being seen suitable and advantageous to situations they face, whether ordinary or extraordinary. Operational and dynamic capabilities, i.e. capabilities that enable a firm to carry out its routine business activities and to change and adapt operational activities. Signaling and interpretation, i.e. recognizing signals as evidence of a novel situation, in response to which existing routines are inappropriate or ineffective. Experimentation and search, i.e. using the trial-and-error method, by which stimulus-response processes are adopted for learning purposes, and exploring alternative ways of responding to novel situations. Knowledge articulation and codification, i.e. evaluating climate adaptation options by exposing them through discussion and internal or external assessments to a selection process that identifies a subset deemed appropriate and legitimate for the organization, and codifying modified routines and their performance implications in manuals, blueprints, decision-support tools, software, targets and so on. Feedback and iteration, i.e. practicing organizational learning as a feedback mechanism which begins with a stimulus leading to the generation of variation through experimentation and search, proceeds with a process of internal selection, articulation and codification, followed by the replication and enactment
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of new routines across the organization, finally returning to the beginning of a new cycle of innovation by virtue of a new stimulus. In the organizational learning cycle, external signals entering the company are recognized and interpreted. A phase of experimentation and search follows. Knowledge is gained from this phase, which is codified in modified routines put in practice and tested, the circle is repeated, whereby new knowledge is acquired from new external signals and through the feedback mechanism, and thus the company is continuously learning.
DISCUSSION AND CONCLUSION From the preceding discussion it follows that climate adaptation is reactive in nature and it may include private and/or public policies. Also, it may be autonomous (i.e. undertaken by individuals) or planned. Whether in developed or in developing countries, climate adaptation may provide protection and benefits, which are restricted to space and time. Indeed, private companies, communities and whole regions may be able to cope with and avoid excessive costs due to climate change impacts and, in some cases, even gain benefits from climate change, by investing on specific climate adaptation measures, but only on a short or medium term and only locally. Up to a certain level of temperature rise, climate adaptation policies may reduce the costs of climate change. However, at higher levels, the costs of climate adaptation will rise sharply and the residual damages will prove very large, resulting in climate adaptation getting more expensive than the gains expected. The above characteristics of climate adaptation differentiate it from mitigation, which entails long-term sighted interventions and provides lasting benefits. Potential climate adaptation responses may differ, depending on many parameters, not only from country to country but also from region to region, even if the same extreme weather events hit them. For example, along with many similar climate adaptation measures and policies, different options may (or may not) be implemented in the developed and in the developing parts of the world. The same holds for the incentives or barriers that may encourage or prevent climate adaptation. Poverty is only one reason, but a very serious one, for such a differentiation. Another reason is the existing information and knowledge about future threats due to climate change. The economic framework for climate adaptation has a critical role to play. It is not only a matter of means available for the implementation of climate adaptation measures. The price of risk and the inherent uncertainty to estimate it are also important parameters. Implementing climate adaptation measures should be regarded
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as an investment option. “What will be the net result, gain or loss, if a climate adaptation option is selected” is a critical question, which may not be easy or even feasible to answer. The political dimensions of climate adaptation are also very important, particularly in the case of developing economies. Regional equity is not easy to be attained as conflicting interests of different regions characterized by uneven development and capacity to resist to climate change impacts contest for limited resources and the winners are the most powerful ones. It follows that climate adaptation, however important, has a limited role to play and is subject to serious restrictions. According to (Stern Review, 2006, pp. 425426), “preliminary estimates suggest that adapting infrastructure and buildings to climate change could increase costs by 1 – 10% taking the total for OECD countries to $15 – 150 billion each year. These calculations assume 3 or 4°C of temperature rise, but the costs are likely to rise sharply if temperatures increase further to 5 or 6°C (as expected if emissions continue to grow and feedbacks amplify the initial warming effect). At this level, very serious risks of abrupt and large-scale change come into play. For human societies, absolute limits will be crossed once a region loses an essential but non-substitutable resource, such as glacier melt water that supplies water to over a billion people during the dry season. Populations will then have little option but to migrate to another region of the world. At very high temperatures, the physical geography would change so strongly that the human and economic geography would be recast too. The full consequences of such effects are still uncertain, but they are likely to involve large movements of populations that would affect all countries of the world and present a new and very difficult dimension to climate adaptation”. Several of the issues discussed in this chapter will be further treated in chapter 7, where many examples from the business world describing particular company adaptation practices will be given.
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Berkout, F., Hertin, J., & Gann, A. (2006). Learning to Adapt: Organisational Adaptation to Climate Change Impacts. Climatic Change, 78(1), 135–156. doi:10.1007/ s10584-006-9089-3 Burton, I., & van Aalst, M. (2004). Look before you leap: a risk management approach for incorporating climate change adaptation in World Bank operations. Final draft. Washington, DC: World Bank. Retrieved January 17, 2009, from http:// www.eird.org/cd/on-better-terms/docs/World-Bank-Look-Before-You-Leap.pdf CDP. (2009). Carbon Disclosure Project. Retrieved January 17, 2009, from http:// www.cdproject.net/ DFID. (2006). Eliminating world poverty: making governance work for the poor. White paper on international development. Department for International Development, London. Retrieved January 17, 2009, from http://www.dfid.gov.uk/wp2006/ whitepaper-printer-friendly.pdf Ellis, S., & Ter Haar, G. (2004). Worlds of power: religious thought and political practice in Africa. London: Hurst & Co. Eriksen, S., & Lind, J. (2008). Adaptation as a Political Process: Adjusting to Drought and Conflict in Kenya’s Drylands. Environmental Management. Retrieved January 15, 2009, from http://www.springerlink.com/content/76111k554l742105/fulltext.pdf Firth, J., & Colley, M. (2006). The adaptation tipping point: are UK businesses climate-proof?Oxford, UK: Acclimatise and UKCIP. IIGCC. (2006). Managing Investments in a Changing Climate. Institutional Investors Group on Climate Change. Retrieved January 15, 2009, from http://www.iigcc. org/docs/PDF/Public/ManagingInvestmentsinaChangingClimateIIGCCconferencereport.pdf IPCC. (2001). Climate Change 2001: Synthesis Report, Annex B. Glossary of Terms. Retrieved January 15, 2009, from http://www.ipcc.ch/ipccreports/tar/vol4/ english/204.htm IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm
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Klein, R. J. T., Eriksen, S. E. H., Næss, L. O., Hammill, A., Tanner, T. M., Robledo, C., & O’Brien, K. L. (2007). Portfolio screening to support the mainstreaming of adaptation to climate change into development assistance. Climatic Change, 84, 23–44. doi:10.1007/s10584-007-9268-x Kovacs, P. (2006 December). Hope for the best and prepare for the worst: how Canada’s insurers stay a step ahead of climate change. Policy Options, 53 – 56. Levitt, B., & March, J. G. (1988). Organizational Learning. Annual Review of Sociology, 14, 319–340. doi:10.1146/annurev.so.14.080188.001535 Lloyd’s of London. (2006). Climate change: adapt or bust? London: Lloyd’s of London. Retrieved January 17, 2009, from http://www.lloyds.com/360 London Climate Change Partnership. (2006). Adapting to Climate Change: Lessons for London. London: Greater London Authority. Ministry of Foreign Affairs of Denmark. (2005). Danish climate and development action programme: a tool kit for climate proofing Danish development cooperation. Copenhagen, Denmark: Danida, Ministry of Foreign Affairs of Denmark. Retrieved January 17, 2009, from http://amg.um.dk/NR/rdonlyres/C559F2DF-6D43-464680ED-C47024062FBD/0/ClimateAndDevelopmentActionProgramme.pdf Overseas Development Institute. (2005). Aftershocks: natural disaster risk and economic development policy. ODI Briefing Paper, November 2005. Retrieved January 17, 2009, from http://www.odi.org.uk/resources/odi-publications/briefingpapers/2005/natural-disaster-risk-economic-development-policy.pdf Sperling, F. (Ed.). (2003). Poverty & climate change: reducing the vulnerability of the poor through climate adaptation. Washington, DC: AfDB, AsDB, DFID, Netherlands, EC, Germany, OECD, UNDP, UNEP and the World Bank (VARG). Retrieved January 10, 2009, from http://www.oecd.org/dataoecd/60/27/2502872.pdf Stern Review. (2006). Stern Review on the Economics of Climate Change. HM Treasury, Cabinet Office. Retrieved December 3, 2008, from http://www.hm-treasury. gov.uk/stern_review_report.htm Sussman, F. G., & Freed, J. R. (2008). Adapting to Climate Change: A Business Approach. Prepared for the Pew Center on Global Climate Change. Retrieved January 10, 2009, from http://www.pewclimate.org/docUploads/Business-Climate adaptation.pdf
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UK FTSE. (2009). FTSE UK Index Series. Retrieved January 10, 2009, from http:// www.ftse.com/Indices/UK_Indices/index.jsp West, C. C., & Gawith, M. J. (Eds.). (2005). Measuring Progress: Preparing for Climate Change through the U.K. Climate Impacts Programme. Oxford, UK: UKCIP. Retrieved January 10, 2009, from http://www.ukcip.org.uk/images/stories/ Pub_pdfs/MeasuringProgress.pdf
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Chapter 6
Climate Change Mitigation Policies
INTRODUCTION In the previous chapter the focus has been on issues concerning adaptation to climate change. Key adaptation concepts and policies were introduced and potential adaptation responses in the case of developed and developing parts of the world were summarized. Also, several incentives encouraging or barriers preventing adaptation were identified and the economic framework for adaptation was outlined. As noticed there, adaptation to climate change refers, by definition, to adjustments in response to actual or expected climatic stimuli or their effects. Using anticipatory or reactive policies, it is intended to moderate harmful effects or to exploit opportunities created by climate change and it may be undertaken by private (individuals, companies) or public entities. It does not address the causes of DOI: 10.4018/978-1-61692-800-1.ch006 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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climate change, which, in order to be anticipated, need different approaches and policies. Mitigation may be effected when such approaches, and related policies, are employed in order to address the causes of climate change. Climate change mitigation is defined to be a human intervention to reduce the sources or enhance the sinks of greenhouse gases (GHGs), where a sink is any process, activity or mechanism that removes a GHG, an aerosol or a precursor of a GHG or aerosol, from the atmosphere (IPCC, 2007b, Annex I – Glossary). Precursors of a GHG or aerosol are atmospheric compounds that are not GHGs or aerosols, but that have an effect on GHG or aerosol concentrations by taking part in physical or chemical processes regulating their production or destruction rates. Mitigation, particularly immediate and strong action aiming at stabilizing concentrations of GHGs by drastically decreasing emissions, is the only means to first stop and then hopefully revert global warming. As stated in (Stern Review, 2006, p. 168), stabilization of concentrations will require deep emissions cuts of at least 25% by 2050, and ultimately to less than one-fifth of today’s levels. The costs of achieving this will depend on a number of factors, particularly progress in bringing down the costs of appropriate technologies. Overall costs are estimated at around 1% of GDP for stabilization levels between 500-550ppm CO2e and much more for lower levels, compared to a global warming cost of 20% of GDP implied by “doing nothing”. Formulating mitigation policies is, in principle, a case for public entities: local and national governments and international organizations. This does not mean that individuals or private enterprises are excluded from mitigation policies. Actually, in the final analysis, it is them that are called to implement mitigation actions. However, planning mitigation policies are tasks exclusively appropriate for public authorities and organizations. Apart from defining the drivers of global emissions’ increase, several other issues are raised in relation to mitigation. How can GHG concentrations in the atmosphere be stabilized? Which mitigation policies are available? Which are the costs of mitigation? Which are the implications of different mitigation policies at country or company level? Are there any opportunities and wider benefits arising from mitigation action on climate change? Which should be the global long-term goals of mitigation policies? Such are the questions to be addressed in this chapter.
DRIVERS OF GLOBAL EMISSIONS’ INCREASE In Chapter 2 the basic facts of global warming were introduced, based almost exclusively on the latest UN’s Intergovernmental Panel on Climate Change Report (IPCC, 2007), particularly on Working Group I’s Fourth Assessment Report on Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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the Physical Science Basis of Climate Change (IPCCa, 2007). These facts concern changes in atmospheric constituents and in radiative forcing, in Earth’s surface and atmosphere, in snow, ice and frozen ground and in the sea level. These changes are due to global warming. The Stern Review provides key past and present facts about the drivers of global emissions’ increase. It also provides relevant key projections. These are summarized as follows (Stern Review, 2006, p. 169).
Stock Rising Due to Human Activities Greenhouse-gas concentrations in the atmosphere now stand at around 430ppm CO2 e, compared with only 280ppm before the Industrial Revolution. The stock is rising, driven by increasing emissions from human activities, including energy generation and land-use change.
Emissions Driven by Economic Development Emissions have been driven by economic development. CO2 emissions per head have been strongly correlated with GDP per head across time and countries. North America and Europe have produced around 70% of CO2 emissions from energy production since 1850, while developing countries – non-Annex I parties under the Kyoto Protocol – account for less than one quarter of cumulative emissions.
Annual Emissions Still Rising Annual emissions are still rising. Emissions of CO2, which accounts for the largest share of GHGs, grew at an average annual rate of around 2.5% between 1950 and 2000. In 2000, emissions of all GHGs were around 42Gt CO2e, increasing concentrations at a rate of about 2.7ppm CO2e per year.
‘Business as Usual’ Leads to 550ppm by 2035 Without action to combat climate change, atmospheric concentrations of GHGs will continue to rise. In a plausible ‘business as usual’ scenario, they will reach 550ppm CO2e by 2035, then increasing at 4.5ppm per year and still accelerating.
Most Future Emissions Growth from Today’s Developing Countries Most future emissions growth will come from today’s developing countries, because of more rapid population and GDP growth than developed countries, and an Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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increasing share of energy-intensive industries. The non-Annex I parties are likely to account for over three quarters of the increase in energy-related CO2 emissions between 2004 and 2030, according to the International Energy Agency, with China alone accounting for over one third of the increase.
Total Emissions to Increase More Rapidly Than Emissions per Head Total emissions are likely to increase more rapidly than emissions per head, as global population growth is likely to remain positive at least to 2050.
Economic Growth and Development and Emissions Growth Not Immutable The relationship between economic growth and development and CO2 emissions growth is not immutable. There are examples where changes in energy technologies, the structure of economies and the pattern of demand have reduced the responsiveness of emissions to income growth, particularly in the richest countries. Strong, deliberate policy choices will be needed, however, to de-carbonize both developed and developing countries on the scale required for climate stabilization.
Increasing Scarcity of Fossil Fuels Will not Stop Emissions Growth Increasing scarcity of fossil fuels alone will not stop emissions growth in time. The stocks of hydrocarbons that are profitable to extract (under current policies) are more than enough to take the world to levels of CO2 concentrations well beyond 750ppm, with very dangerous consequences for climate-change impacts. Indeed, with business as usual, energy users are likely to switch towards more carbon-intensive coal, oil shales and synfuels, tending to increase rates of emissions growth. It is important to redirect energy-sector research, development and investment away from these sources towards low-carbon technologies.
Carbon Capture and Storage to Allow Continued Use of Fossil Fuels Extensive carbon capture and storage would allow some continued use of fossil fuels, and help guard against the risk of fossil fuel prices falling in response to global climate-change policy, undermining its effectiveness. In summary, it follows from the above that the main drivers of the rising global GHG emissions are human activities, among which energy generation and land-use Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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change are the most important ones. Economic development and GDP per capita increase is typically related to such activities. North America and Europe have been the major contributors to CO2 emissions up to now, but most future emissions growth will come from today’s developing countries expected to develop at fast rates. This does not mean that development is necessarily linked with rising GHG concentrations, as there are examples of reduced responsiveness of emissions to income growth, particularly in the richest countries. In any case, without action to combat climate change, atmospheric concentrations of GHGs will continue to rise. Such actions are related, among others, to redirecting energy-sector research, development and investment away from fossil fuels, towards low-carbon technologies.
STABILIZATION OF GREENHOUSE-GAS CONCENTRATIONS The Stern Review explains what needs to happen to emissions in order to stabilize GHG concentrations in the atmosphere, and the range of trajectories available to achieve this. Its key messages are the following (Stern Review, 2006, p. 193):
Global Temperatures will Continue to Rise The world is already irrevocably committed to further climate changes, which will lead to adverse impacts in many areas. Global temperatures, and therefore the severity of impacts, will continue to rise unless the stock of GHGs is stabilized.
Urgent Action Needed Now Urgent action is now required to prevent temperatures rising to even higher levels, lowering the risks of impacts that could otherwise seriously threaten lives and livelihoods worldwide.
Maintaining Stabilization Requires Over 80% Emission Cuts Stabilization – at whatever level – requires that annual emissions be brought down to the level that balances the Earth’s natural capacity to remove GHGs from the atmosphere. In the long term, global emissions will need to be reduced to less than 5 GtCO2e, over 80% below current annual emissions, to maintain stabilization. The longer emissions remain above the level of natural absorption, the higher the final stabilization level will be.
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The Longer Action is Delayed, the Harder for Stabilization Stabilization cannot be achieved without global action to reduce emissions. Early action to stabilize this stock at a relatively low level will avoid the risk and cost of bigger cuts later. The longer action is delayed, the harder it will become.
Huge Cuts for Stabilising at or below 550ppm CO2e Stabilising at or below 550ppm CO2e (around 440 - 500ppm CO2 only) would require global emissions to peak in the next 10 - 20 years, and then fall at a rate of at least 1 - 3% per year. By 2050, global emissions would need to be around 25% below current levels. These cuts will have to be made in the context of a world economy in 2050 that may be three to four times larger than today – so emissions per unit of GDP would need to be just one quarter of current levels by 2050.
High Cost of Delay Delaying the peak in global emissions from 2020 to 2030 would almost double the rate of reduction needed to stabilize at 550ppm CO2e. A further ten-year delay could make stabilization at 550ppm CO2e impractical, unless early actions were taken to dramatically slow the growth in emissions prior to the peak.
Stabilization at 450ppm CO2e Likely Unachievable To stabilize at 450ppm CO2e, without overshooting, global emissions would need to peak in the next 10 years and then fall at more than 5% per year, reaching 70% below current levels by 2050. This is likely to be unachievable with current and foreseeable technologies.
More Rapid Cuts Needed if Carbon Absorption Weakened If carbon absorption were to weaken, future emissions would need to be cut even more rapidly to hit any given stabilization target for atmospheric concentration.
Impacts Irreversible Overshooting paths involve greater risks to the climate than if the stabilization level were approached from below, as the world would experience at least a century of temperatures, and therefore impacts, close to those expected for the peak level of emissions. Some of these impacts might be irreversible. In addition, overshooting Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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paths require that emissions be reduced to extremely low levels, below the level of natural absorption, which may not be feasible.
Energy Systems Subject to Inertia Energy systems are subject to very significant inertia. It is important to avoid getting ‘locked into’ long-lived high carbon technologies, and to invest early in low carbon alternatives”. The main conclusion of the above key messages is very unsettling: worsening of the current situation of GHG concentrations and increasing global warming should be expected, whatever actions are taken in order to counter the drivers of climate change. Indeed, “the world is already irrevocably committed to further climate changes” as energy systems are subject to very significant inertia. Prevention of further deterioration and, more specifically, maintaining stabilization, implies urgently taking global action capable to reduce global emissions to over 80% below current annual emissions, otherwise some of the global warming impacts might be irreversible. Stabilizing GHG concentrations in the atmosphere demands that the world moves away from high carbon technologies, and invests early in low carbon alternatives. (Greenfacts, 2007) outlines some examples and directions for policies and instruments to stabilize concentrations (note, however, that some of these policies and instruments may have drawbacks and others may have no guaranteed measurable results): • •
•
•
•
“Integrating climate policies into broader development policies makes implementation easier. Regulations and standards generally provide some certainty about emission levels, but they may not encourage innovation and the development of new technologies. Taxes and charges can set a “carbon price” (a cost for each unit of GHG emissions) and be an effective mitigation incentive, but cannot guarantee a particular level of emissions. Tradable emission permits establish a “carbon price”. The volume of allowed emissions determines their environmental effectiveness, while the way permits are allocated determines who bears the costs. Fluctuation in the “carbon price” makes it difficult to estimate the total cost of complying with emission permits. Subsidies and tax credits can provide financial incentives for the development and diffusion of new technologies. Though sometimes costly, they are often critical to overcome barriers.
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•
•
•
Voluntary agreements between industry and governments are politically attractive, raise awareness, and have played a role in the evolution of many national policies. Only a few of them have led to measurable emission reductions. Awareness campaigns may positively affect environmental quality by promoting informed choices and possibly contributing to behavioral change. However, their impact on emissions has not been measured yet. Research, Development and Demonstration (RD&D) can stimulate technological advances, reduce costs, and enable progress toward stabilization”.
In the following paragraphs, specific instruments and climate change mitigation policies will be presented, which may be employed in order to stabilize GHG concentrations. The first such instrument is carbon pricing. Those who produce GHGs (individuals and businesses) should face the full consequences of the social, economic and environmental costs of their actions themselves. This may be done through taxing, trading or regulating mechanisms. This will lead them to switch away from high-carbon goods and services, and to invest in low-carbon alternatives. The second instrument of climate change mitigation policy is technology. Lowcarbon and high-efficiency technologies are needed, designed to displace current practices that contribute heavily to global warming. Such innovative technologies may be the outcome of directed Research and Development projects. The third instrument for climate change mitigation is policies to remove the barriers to behavioral change. Such barriers include lack of information, the complexity of the choices available, or the cost of mitigation. Understanding the nature of climate change by society is of critical importance.
INSTRUMENTS OF MITIGATION The Kyoto Protocol As said in the Introduction of this chapter, planning mitigation policies is, in principle, a case for public entities, including local and national governments and international organizations. Thus, important action frameworks and agreements have been formulated and put in practice in order to promote policies aiming at mitigating climate change. One such multilateral agreement, the most important one until now for global warming mitigation, is the Kyoto Protocol (Kyoto Protocol, 1997), which has strengthened decisively the international response to climate change. It is an international environmental treaty intended to achieve “stabilization of GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”, as stated in Article 2 (Objective) Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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of the Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). It was produced at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, which was held in Rio de Janeiro, Brazil, from 3–14 June 1992. The five principal concepts of the Kyoto Protocol are the following: •
•
• • •
Commitments. These refer to the reduction of GHGs and are legally binding for Annex I countries (see below), while there are general commitments for all member countries. Implementation. Annex I countries are required to prepare policies and measures for the reduction of GHGs in their respective countries. In addition, they are required to increase the absorption of these gases and utilize specific mechanisms mentioned in the sequel. By doing the above they will be rewarded with credits that would allow more GHG emissions at home. Minimizing Impacts on Developing Countries. This may be done by establishing an adaptation fund for climate change. Accounting, Reporting and Review. This ensures the integrity of the Protocol. Compliance with the commitments. A Compliance Committee enforces compliance with the commitments under the Protocol.
The Protocol establishes legally binding commitments for the reduction of four GHGs (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride), and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by industrialized nations, as well as general commitments for all member countries.The Protocol is based on the Global Warming Potential (GWP), an index based upon radiative properties of well-mixed GHGs, measuring the radiative forcing of a unit mass of a given well-mixed GHG in the present-day atmosphere integrated over a chosen time horizon, relative to that of CO2. The GWP represents the combined effect of the differing times these gases remain in the atmosphere and their relative effectiveness in absorbing outgoing thermal infrared radiation. Emissions are considered over a 100-year horizon. The Protocol was initially adopted for use on 11 December 1997 in Kyoto, Japan. It entered into force on 16 February 2005 and, as of 2008, 183 parties had ratified it. Under Kyoto, industrialized countries (the so-called Annex I parties, because they are included in Annex I of the Protocol) agreed to reduce their collective GHG emissions by 5.2% compared to the year 1990 (however, compared to the emissions levels that would be expected by 2010 without the Protocol, this limitation represents a 29% cut). National limitations range from 8% reductions for the European Union and some others to 7% for the United States, 6% for Canada, Hungary, Japan, and
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Poland and 0% for Russia, New Zealand, and Ukraine. The treaty permitted GHG emission increases of 8% for Australia and 10% for Iceland. As stated in Article 2 of the Protocol, each Party (Annex I country), in achieving its quantified emission limitation and reduction commitments (which are stated in Article 3 of the Protocol), shall implement and/or further elaborate policies and measures in accordance with its national circumstances in order to promote sustainable development. Article 2 is making specific reference to the Montreal Protocol, a treaty entered into force on January 1, 1989, intended to control substances that deplete the ozone layer, and more specifically, to phase out the production of a number of substances believed to be responsible for ozone depletion. Article 2 suggests several policies and measures, such as: “(i) Enhancement of energy efficiency in relevant sectors of the national economy; (ii) Protection and enhancement of sinks and reservoirs of GHGs not controlled by the Montreal Protocol, taking into account its commitments under relevant international environmental agreements; promotion of sustainable forest management practices, afforestation and reforestation; (iii) Promotion of sustainable forms of agriculture in light of climate change considerations; (iv) Research on, and promotion, development and increased use of, new and renewable forms of energy, of CO2 sequestration technologies and of advanced and innovative environmentally sound technologies; (v) Progressive reduction or phasing out of market imperfections, fiscal incentives, tax and duty exemptions and subsidies in all GHG emitting sectors that run counter to the objective of the Convention and application of market instruments; (vi) Encouragement of appropriate reforms in relevant sectors aimed at promoting policies and measures, which limit or reduce emissions of GHGs not controlled by the Montreal Protocol; (vii) Measures to limit and/or reduce emissions of GHGs not controlled by the Montreal Protocol in the transport sector; (viii) Limitation and/or reduction of methane emissions through recovery and use in waste management, as well as in the production, transport and distribution of energy”. Furthermore, Article 2 of the Protocol provides that each Party shall “cooperate with other such Parties to enhance the individual and combined effectiveness of their policies and measures adopted under this Article…To this end, these Parties shall take steps to share their experience and exchange information on such poli-
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cies and measures, including developing ways of improving their comparability, transparency and effectiveness”. In the Kyoto Protocol specific mechanisms (the so-called “flexible mechanisms”) are defined, including Emissions Trading, the Clean Development Mechanism and Joint Implementation, which are described in the sequel. Under these mechanisms Annex I Parties may acquire carbon credits as cheaply as possible, while Non-Annex I Parties may maximize the value of carbon credits generated from their domestic emission reduction projects. Each country has a certain degree of flexibility in how it makes and measures its emissions reductions - in the case of the European Union more may be found in (Europa, 2007a). In particular, the above mechanisms allow Annex I Parties to meet their GHG emission limitations by purchasing emission reductions credits from elsewhere, through financial exchanges, projects that reduce emissions in non-Annex I Parties, from other Annex I Parties, or from Annex I Parties with excess allowances. This practically means that, while Non-Annex I Parties have no emission restrictions, they do have financial incentives to develop emission reduction projects in order to receive respective credits that can then be sold to Annex I Parties, thus encouraging sustainable development. The flexible mechanisms also allow Annex I Parties with efficient, low GHG emitting industries and high environmental standards to purchase carbon credits on the world market instead of reducing GHG emissions domestically. The Protocol has been favorably accepted by the world community in general, but it has also produced questions and criticism. As an example (Richels & Manne, 1998), it has been criticized as being unclear on a number of topics, including the rules governing its aforementioned basic mechanisms, i.e. emissions trading, joint implementation and the Clean Development Mechanism, and also the treatment of carbon sinks (see below). Another issue of criticism is that there is a weak knowledge base regarding the costs of sink enhancement and of controlling several of the relevant trace gases. Also, Kyoto costs calculation is complicated by the issue of “what happens next”. Energy sector investments are typically long-lived and today’s investment decisions are not only influenced by what happens during the next decade, but also by what happens thereafter. Thus, assumptions are required concerning the longer-term requirements in order to estimate the costs of implementing emission cuts in the first commitment period. The international negotiation process offers little guidance on this issue. This further complicates the process of analysis. Similar considerations have appeared in the literature but they have not received definite answers. The Kyoto Protocol has been and is being reviewed and talks on commitments for the post-2012 period are on-going, so that the Parties take “appropriate action” on the basis of the best available scientific, technical, and socio-economic information. Several meetings have already taken place, including the UN meeting in Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Bali in December 2007, which reached agreement on a new negotiating mandate for a successor treaty to the Kyoto Protocol (Europa, 2007b). The ‘Bali roadmap’ (a collection of initiatives and decisions around key areas such as climate change mitigation and adaptation, technology transfer and financing) put as its aim to finalize a new climate treaty by December 2009 in Copenhagen. The roadmap includes consideration of quantified targets by developed countries, which could mean reductions on 1990 levels, as well as mitigation actions by developing countries. Next to Bali, the UN climate change conference in Poznan (Europa, 2007c), which took place in December 2008, kept on track the international process to conclude the new global climate agreement in Copenhagen. It took a series of decisions including work programmes for 2009, aiming at accelerating the negotiations. Parties also reached a solution to make the Kyoto Protocol’s Adaptation Fund for developing countries operational. The climate and energy package agreed earlier at the Brussels summit of EU attracted considerable attention at the conference. Apart from the above conferences, several policy developments at a regional and country level are also taking place. As an example, in Europe, the European Commission released proposals in January 2008 to strengthen the EU’s response to climate change, including an update of the EU Emissions Trading Scheme (EU ETS) in time for Phase 3 of the Scheme, which will start in 2013 (CDP, 2008; Ellerman & Buchner, 2007).
Carbon Trading As mentioned above, specific “flexible mechanisms” are defined in the Kyoto Protocol, aimed to enhance the Protocol’s objectives. One such mechanism is Emissions Trading, which is used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Note that Emissions Trading is not restricted to GHGs. Indeed, the efficacy of the mechanism, which was later called the “Cap and Trade” approach to air pollution abatement, was first demonstrated in a series of micro-economic computer simulation studies between 1967 and 1970 for the National Air Pollution Control Administration. In these studies mathematical models of several cities and their emission sources were used in order to compare the cost against effectiveness of various air pollution abatement strategies. For each strategy comparison was made with the “least cost solution” produced by a computer optimization program, which finds the least costly combination of source reductions to achieve a given abatement goal. In each case it was found that the least cost solution was dramatically less costly for the same level of pollution produced by any conventional abatement strategy. The history of the emissions trading development may be divided into four phases (Voss, 2007): Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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1.
2.
3.
4.
Gestation: Theoretical articulation of the instrument and, independent of the former, tinkering with “flexible regulation” at the US Environmental Protection Agency. The phase covered the 1960’s and part of the 1970’s. Proof of Principle: First developments towards trading of emission certificates based on the “offset-mechanism” taken up in Clean Air Act in 1977. The phase covered part of the 1970’s and the decade of the 1980’s. Prototype: Launching of a first “cap and trade” system as part of US Acid Rain Program, officially announced as a paradigm shift in environmental policy, as prepared by “Project 88”, a network building effort to bring together environmental and industrial interests in the US. The phase covered most part of the 1990’s. Regime formation: branching out from US clean air policy to global climate policy, and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the “carbon industry”. The phase covered part of the 1990’s and the 2000’s.
The Emissions Trading mechanism works as follows: A central authority, e.g. a government or an international body, sets a limit (cap) on the amount of a pollutant that can be emitted. The cap is usually lowered over time, aiming towards a national emissions reduction target. Companies or other groups are issued emission permits that represent the right to emit a specific amount of the pollutant. Each emission permit defines a number of allowances (credits). The total amount of credits issued cannot exceed the total emissions level defined by the cap. If a company needs to increase its emission allowance (i.e. to pollute more), it can buy credits from other companies that pollute less, thus paying a charge for polluting more than it is allowed to that company. The seller of the credits is being rewarded for having reduced emissions compared to its permit. Both the buyer and the seller can thus benefit from emissions trading. The transfer of credits results, at least in theory, in emissions reduction at the lowest possible cost to society, because the reduction shall be materialized by those who most easily and cheaply can achieve it. In other words, the mechanism creates incentives that reduce the cost of achieving a pollution reduction goal by allowing individual companies to choose how or if they will reduce their emissions and, in general, to choose the least-costly way to comply with the pollution regulation. Note that organizations, which do not pollute, may also participate in the mechanism. Thus environmental groups can purchase and sell allowances or credits. The above mechanism of Emissions Trading is applied also in the case of GHGs, which currently make up the bulk of emissions trading. In the Kyoto Protocol, in particular, quotas were agreed by each participating country for carbon emissions, which are calculated in tons of CO2e, so that, for the 5-year compliance period from Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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2008 until 2012, nations that emit less than their quota will be able to sell emissions credits to nations that exceed their quota. Quotas are measured in AAUs (Assigned Allocation Units) or ‘allowances’ for short. The initial amount of AAUs assigned to a country is equal to the country’s 1990 level of GHG emissions, less five percent, multiplied over five years. Each AAU is worth one ton of CO2e. This formula is set forth in Article 3 Paragraph 1 of the Kyoto Protocol. The actual emission limitations for each Annex I Parties are listed in Annex B of the Kyoto Protocol. Note that it is also possible for developed countries, through the Clean Development Mechanism and Joint Implementation projects, to sponsor carbon projects that reduce GHG emissions in other countries, thus generating tradeable carbon credits. Carbon trading countries maintain an inventory of emissions at national and installation level. In some industrial processes emissions can be physically measured by inserting sensors and flowmeters in chimneys and stacks, but many types of activity rely on theoretical calculations for measurement. Depending on local legislation, these measurements may require additional checks and verification by government or third party auditors, prior or post submission to the local regulator. In financial terms, compliance through trading within the Kyoto commitment period is estimated by the Intergovernmental Panel on Climate Change to range between 0.1-1.1% of GDP among trading countries, while the Stern report estimates that the costs of doing nothing will be 5 to 20 times higher. Allowances and carbon credits are tradeable with a transparent price, thus financial investors can buy them on the spot markets for speculation purposes, or link them to future contracts. Carbon emissions’ trading has been steadily increasing in recent years. According to the World Bank’s Carbon Finance Unit, 374 mtCO2e (million metric tons of carbon dioxide equivalent) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e), which represents a 41% increase relative to 2003 (78 mtCO2e). According to the World Bank, the size of the carbon market was 11 billion USD in 2005, 30 billion USD in 2006, and 64 billion USD in 2007. With the creation of a market for mandatory trading of carbon CO2 emissions within the Kyoto Protocol, the London financial market has established itself as the center of the carbon finance market. 23 multinational corporations came together in the G8 Climate Change Roundtable, a group formed at the January 2005 World Economic Forum. On 9 June 2005 the group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish “clear, transparent, and consistent price signals” through “creation of a long-term policy framework” that would include all major producers of GHGs. By December 2007 the group included 150 multinational corporations.
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Kyoto enables a group of several Annex I countries to join together to create a market-within-a-market. The largest such group within the Kyoto Protocol is the European Union Emissions Trading Scheme (EU ETS), which includes all EU member states as all of them have ratified the Protocol. The EU ETS uses EAUs (EU Allowance Units), each equivalent to a Kyoto assigned emissions credits (AAU) unit. The program caps the amount of CO2 that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU’s CO2 emissions. Under the EU ETS, large emitters of CO2 within the EU must monitor and annually report their CO2 emissions, and they are obliged every year to return an amount of emission allowances to the government that is equivalent to their CO2 emissions in that year. Initial allocations on a plant-by-plant basis were given free of charge to emitters of CO2. An operator may also purchase EU allowances from others (installations, traders, government). If an installation has received more free allowances than it needs, it may sell them to anybody. Phase I of the Scheme, which commenced operation in January 2005 and ended in 2007, permitted participants to trade amongst themselves and in validated credits from the developing world through Kyoto’s Clean Development Mechanism. This phase, which received much criticism due to oversupply and the distribution method of allowances, established a strong carbon market. Compliance was high in 2006, showing increasing confidence in the scheme, although the value of allowances dropped when the national caps were met. Phase II links the ETS to other countries participating in the Kyoto trading system. The European Commission has been tough on Member States’ Plans for Phase II, dismissing many of them as being too loose again. Carbon trading has been met with both, advocates and critics. The former point to the fact that, carbon trading, by solely aiming at the cap, avoids the consequences and compromises that often accompany other methods (e.g. carbon tax or direct regulation). It can be cheaper and politically preferable for existing industries because the initial allocation of allowances is proportional to historical emissions. In addition, most of the money in the system is spent on environmental activities. Critics, on the other hand, point to several problems, including complexity, monitoring, failures in accounting, unnecessary cost and enforcement, while the initial allocation methods and cap are sometimes disputed. Critics, who are mainly NGOs and movements, focus mainly on the carbon market created following Kyoto Protocol, arguing that the objective should be to decrease the cap up to a point where it is equal to zero. They would prefer making reductions at the source of pollution and energy policies that are justice-based and community-driven. Other approaches favor carbon tax, considered to be a more direct, transparent and effective approach. Carbon tax is a “price instrument” because it fixes the price to be payed for a certain level of pollution while the emission level may vary according to economic activity, therefore the environmental outcome is not guaranteed. In contrast, an emissions trading system Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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is a “quantity instrument” because it fixes the overall emission level (quantity) and allows the price to be payed for a certain level of pollution to vary according to market conditions.
The Clean Development Mechanism In addition to Emissions Trading, the Kyoto Protocol, under Article 12, provides for the Clean Development Mechanism (CDM), which is an arrangement contributing to the stabilization of GHG concentrations in the atmosphere. In particular CDM offers flexibility to industrialized countries with a GHG reduction commitment (the Annex B countries) to achieve cost-effective emission reductions, by investing in projects that reduce emissions in developing instead of their own countries. Such investments (“carbon projects”), in order to be eligible under CDM, need to fullfil the requirement of “additionality”: the planned reductions would not occur without the additional incentive provided by emission reductions credits. There are currently two rival interpretations of the additionality criterion, ‘environmental additionality’ and ‘project additionality’. According to the former, a project is additional if the emissions from the project are lower than the “baseline”, corresponding to emissions in absence of the project. The baseline may be estimated through reference to emissions from similar activities and technologies in the same country or other countries, or to actual emissions prior to project implementation. In the other interpretation, the project must not have happened without the CDM. Investors argue that the environmental additionality interpretation would make the CDM simpler, while NGOs have argued that this interpretation would open the CDM to “free-riders”, permitting developing countries to emit more CO2 while failing to produce emission reductions in the CDM host countries. Further to additionality, use of CDM should be ‘supplemental’ to domestic (Annex B countries) actions to reduce emissions. The CDM is supervized by the CDM Executive Board and is under the guidance of the Conference of the Parties of UNFCCC. An Adaptation Fund was established to finance concrete adaptation projects and programmes in developing countries that are Parties to the Kyoto Protocol. The Fund is to be financed with a share of proceeds from CDM project activities and receive funds from other sources. Apart from serving the above purpose, CDM is intended to assist developing countries in achieving sustainable development. Note that CDM was met with considerable scepticism and was opposed by environmental NGOs and developing countries, who felt that industrialized countries should address the issue of emission reductions within their boundaries first and expressed fears that the environmental integrity of the mechanism would be too hard to guarantee.
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CDM works as follows: An Annex B country (applicant) wishing to get credits from a carbon project must obtain the consent of the developing country hosting the project that the project will contribute to sustainable development. Then, using methodologies approved by the CDM Executive Board, the applicant must prove that the project would not have happened anyway (that is, it fullfils additionality). The applicant must also establish the baseline, that is, it must provide a hypothetical scenario estimating the future emissions in absence of the project. This is validated by a third party agency, called a Designated Operational Entity (DOE), to ensure that the project results in real, measurable, and long-term emission reductions. The CDM Executive Board then decides whether or not to register (approve) the project. If a project is registered and implemented, the CDM Executive Board issues credits, called Certified Emissions Reductions (CERs), else carbon credits, where each unit is equivalent to the reduction of one metric ton of CO2e. The total number of credits issued is equal to the monitored difference between the baseline and the actual emissions, verified by the DOE. As of March 10, 2009, 1,440 projects had been registered by the CDM Executive Board as CDM projects (CDM Statistics, 2009). These projects reduce GHG emissions by an estimated 269 mtCO2e per year. There are about 4,200 projects already or to be certified. These projects would reduce CO2 emissions by 2.9 billion tons CO2e until the end of 2012. However, the previous adoption rate suggests that only a fraction of these projects will be certified. For comparison, the current emissions of the EU-15 are about 4.2 billion tons CO2e per year (European Environmental Agency, 2009). The majority of CERs issued so far have been from HFC destruction projects. However, there are only a limited number of such project sites globally, of which most if not all have already been converted into projects. The fastest-growing project types are renewable energy and energy efficiency (Wikipedia, 2009a).
Joint Implementation The 3rd flexibility mechanism of the Kyoto Protocol is Joint Implementation, which takes place in countries having an emission reduction requirement and thus has caused less concern than CDM, which takes place in developing countries having no such commitment. According to Article 6 of the Protocol, any Annex I country can invest in emission reduction projects (referred to as “Joint Implementation Projects”) in any other Annex I country as an alternative to reducing emissions domestically. Thus, industrialized countries can lower the costs of complying with their emissions targets by investing in GHG reductions in another industrialized country where reductions are cheaper, and getting the respective credit. Most Joint Implementation projects are hosted or expected to take place inside the group of the
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12 countries noted in Annex B of the Kyoto Protocol, the so-called “economies in transition”, situated in Central and Eastern Europe and including Russia and Ukraine. The Joint Implementation mechanism works as follows: a country implementing a Joint Implementation project in another country is awarded credits called Emission Reduction Units (ERUs), where one ERU represents an emission reduction equaling one ton of CO2e. The ERUs come from the host country’s pool of assigned emissions credits (AAUs). As mentioned earlier, each Annex I party has a predetermined amount (quota) of AAUs. By requiring Joint Implementation credits to come from a host country’s pool of AAUs, the Kyoto Protocol ensures that the total amount of emissions credits among Annex I parties does not change for the 5 years’ duration of the Kyoto Protocol’s first commitment period. As an illustration (Wikipedia, 2009b), suppose the Kyoto Protocol only had three Annex I parties, countries A, B and C, each having 100 AAUs for the whole first commitment period. This would mean that the total amount of credits at the beginning of the first commitment period would be equal to 300. Now suppose that A hosted a Joint Implementation project for B, resulting in 10 credits-worth of emissions reductions. A would have to convert 10 of its AAUs to ERUs and transfer them to B. So in the end, A would have ten less credits, or 90 AAUs (100 AAUs minus 10 converted ERUs); B would have ten more credits (100 AAUs plus 10 ERUs from the project), and country C would remain with its 100 AAUs. The total number of credits at the end of the first commitment period would be the same (300). For the latest developments on Joint Implementation see (UNFCCC, 2009).
TECHNOLOGY POLICIES Shifting to New or Improved Technologies In the previous paragraph, important climate change mitigation instruments, such as carbon trade, were presented. These instruments, however, are not sufficient to solve the problem of increased carbon concentrations due to several failures and barriers, some of which have been mentioned. Another, very important, instrument of climate change mitigation policies, complimentary to the ones presented, is technology. Past and current high-carbon and low-efficiency technological solutions and practices have been responsible, to a big extent, for global warming. Innovative technology with applications put in place of these solutions and practices may greatly help to cope with the global warming problem. The Stern Review (2006, p. 347), in particular, points out that carbon pricing alone will not be sufficient to reduce emissions on the scale and pace required. This is because:
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• •
•
Future pricing policies of governments and international agreements should be made as credible as possible but cannot be 100% credible. The uncertainties and risks both of climate change, and the development and deployment of the technologies to address it, are of such scale and urgency that the economics of risk points to policies to support the development and use of a portfolio of low-carbon technology options. The positive externalities of efforts to develop them will be appreciable, and the time periods and uncertainties are such that there can be major difficulties in financing through capital markets.
The Stern Review suggests that effective action on the scale required to tackle climate change requires a widespread shift to new or improved technology in key sectors such as power generation, transport and energy use. Technological progress can also help reduce emissions from agriculture and other sources and improve adaptation capacity. Regarding the R&D and technology diffusion, the private sector plays the major role. Closer collaboration between government and industry will further stimulate the development of a broad portfolio of low carbon technologies and reduce costs. Co-operation can also help overcome longer-term problems, such as the need for energy storage systems, for both stationary applications and transport, to enable the market shares of low-carbon supply technologies to be increased substantially. Furthermore, the Stern Review (2006, p. 347) suggests that governments can help foster change in industry and the research community through a range of instruments: •
• •
Carbon pricing, through carbon taxes, tradable carbon permits, carbon contracts and/or implicitly through regulation will itself directly support the research for new ways to reduce emissions; Raising the level of support for R&D and demonstration projects, both in public research institutions and the private sector; Support for early stage commercialization investments in some sectors.
Such policies, according to the Stern Review, should be complemented by tackling institutional and other non-market barriers to the deployment of new technologies. These issues will vary across sectors with some, such as electricity generation and transport, requiring more attention than others. Governments are already using a combination of market-based incentives, regulations and standards to develop new technologies. These efforts should increase in the coming decades. The models employed suggest that, in addition to a carbon price, deployment incentives for
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low-emission technologies should increase two to five times globally from current levels of around $33billion. Global public energy R&D funding should double, to around $20 billion, for the development of a diverse portfolio of technologies.
Technological Options As noted above, effective action to tackle climate change requires a widespread shift to new or improved technology, including energy efficiency improvements, the switch to less carbon-intensive fuels, nuclear power, renewable energy sources, enhancement of biological sinks, and reduction of non-CO2 GHG emissions, in key sectors. Technological change leading, among others, to better efficiency, reduced pollution and reduced costs, may be attained through innovation, that is, successful exploitation of new ideas (Department of Trade and Industry, 2003). Four types of innovation in relation to technological change may be identified (Freeman, 1992):
Incremental Innovations They represent the continuous improvements of existing products through improved quality, design and performance, as has occurred with car engines;
Radical Innovations They are new inventions that lead to a significant departure from previous production methods, such as hybrid cars;
Changes in the Technological Systems They occur at the system level when a cluster of radical innovations impact on several branches of the economy, as would take place in a shift to a low-emission economy;
Changes of Techno-Economic Paradigm They occur when technology change impacts on every other branch of the economy (e.g., the internet). According to the World Resources Institute (2006), the different emissions sources, including not only stationary ones, share total emissions as shown in Figure 1 (Stern Review, 2006, p. 171). Emissions are presented according to the sector from which they are directly emitted, i.e. emissions are by source (as opposed to end user/activity).
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Figure 1. GHG emissions by source in 2000. (Source: Stern Review, 2006)
The Stern Review reports that, of the total emissions, 57% are from burning fossil fuels in power, transport, buildings and industry, while agriculture and changes in land use (particularly deforestation) produce 41% of emissions. Total greenhouse-gas emissions were 42 GtCO2e in 2000, of which 77% were CO2, 14% methane, 8% nitrous oxide and 1% so-called F-gases such as perfluorocarbon and sulphur hexafluoride. Sources of greenhouse-gas emissions comprise (Stern Review, 2006, p. 170): •
• •
Fossil-fuel combustion for energy purposes in the power, transport, buildings and industry sectors. Combustion of coal, oil and gas in electricity and heat plants accounted for most of carbon emissions, followed by transport (of which three quarters is road transport), manufacturing and construction and buildings. Land-use change such as deforestation releases stores of CO2 into the atmosphere. Methane, nitrous oxide and F-gases are produced by agriculture, waste and industrial processes. Industrial processes such as the production of cement and chemicals involve a chemical reaction that releases CO2 and non-CO2 emissions. Also, the process of extracting fossil fuels and making them ready for use generates CO2 and non-CO2 emissions (so-called fugitive emissions).
Large stationary CO2 sources are included among the key sectors that are responsible for global warming. Such sectors appear in Table 1 (Metz et al., 2007, p. 2), which shows the profile by process or industrial activity of worldwide large stationary CO2 sources with emissions of more than 0.1 million tons of CO2 per year. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Table 1. Profile by process or industrial activity of worldwide large stationary CO2 sources with emissions of more than 0.1 million tons of CO2 per year Process
Number of sources
Emissions MtCO2yr-1
Power
4,942
10,539
Cement production
1,175
932
Refineries
638
798
Iron and steel industry
269
646
Petrochemical industry
470
379
Oil and gas processing
Not available
50
Other sources
90
33
303
91
Fossil fuels
Biomass Bioethanol and bioenergy
Source: Metz et al., 2007
From the preceding presentation it follows that innovation, which will produce new or improved technology, is urgently needed in sectors such as those mentioned above. As the Stern Review points out, most of the development and deployment of new technologies will be undertaken by the private sector. The role of governments is to provide a stable framework of incentives. On the other hand, low emissions technologies should be put in place of old high emissions and low efficiency ones.
Power Generation Technologies New or improved technology and low emissions options are needed first of all in the power sector, including further development of existing technology or adoption of non-polluting, in terms of GHGs, options (nuclear, gas turbine technology, wind energy systems, photovoltaics, etc). As shown in Table 1, power is by far the most polluting sector, therefore it is key to decarbonising the global economy. However, this sector is characterized by low levels of R&D expenditure by firms, especially compared with other sectors, such as the car industry, the electronics industry and the pharmaceutical sector (Alic et al., 2003). More generally, the available data on energy R&D expenditure show a downward trend in both the public and private Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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sector (OECD, 2006). The declines in public and private R&D have been attributed to three factors (Stern Review, 2006, pp. 352-353). First, energy R&D budgets expanded greatly in the 1970s in response to the oil price shocks in the period, and there was a search for alternatives to imported oil. With the oil price collapse in the 1980s and the generally low energy prices in the 1990s, concerns about energy security diminished, and were mirrored in a relaxation of the R&D effort. Subsequent rises in oil prices have not, yet, led to a significant increase in energy R&D. Second, following the liberalization of energy markets in the 1990s, competitive forces shifted the focus from long-term investments such as R&D towards the utilization of existing plant and deploying well-developed technologies and resources - particularly of natural gas for power and heat, that had been the product of R&D and investment over the previous three decades. Third, there were huge declines in R&D expenditures on nuclear power following the experiences of many countries with cost over-runs, construction delays, and the growth of public concerns about reactor safety, nuclear proliferation and nuclear waste disposal. In 1974, electricity from nuclear fission and fusion accounted for 79% of the public energy R&D budget; it still accounts for 40%. Apart from nuclear technologies, energy R&D budgets decreased across the board. Nevertheless, R&D efforts to develop alternative (renewable) sources of power are continuing. One area of such efforts, which merits special attention, biofuels, will be discussed in a separate paragraph. The reason for giving it special consideration is to show that the problem of replacing fossil fuels by climate-friendly ones and, more generally, the problem of mitigating climate change is extremely complex and no easy technological solutions are readily available, which are technically successful and also acceptable in economic and social terms. Transport is a very important contributor to climate change. Reducing CO2 emissions produced by transport is likely to require a combination of measures, including increased energy efficiency, new technology introduction, and fuel switching. One group of such measures concern demand management. On the technology side, important technologies can be divided into (a) vehicles and (b) fuels. Key vehicle technologies are (E4tech, 2006, p. i): • • •
battery electric vehicles, for niche markets including urban journeys hybrid-electric vehicles, replacing conventional gasoline and diesel vehicles fuel cell vehicles, potentially able to replace all conventional vehicles. Different fuels can be used in these different vehicles:
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• •
•
electricity will be required for battery vehicles, and for some hybrids, known as plug-in hybrids biofuels can be introduced either as blends in current fuels, and used in current vehicles and hybrids, or potentially at levels of 100% with some engine modifications hydrogen is probably required for fuel cell vehicles, and could be also used in internal combustion engines.
Among the promising technological innovations that are currently under research is hydrogen for transport (Stern Review, 2006, p. 357). Hydrogen, which would be best suited to road vehicles, could potentially offer complete diversification away from oil and provide very low carbon transport. There are several hydrogen projects around the world. The main ways of producing hydrogen are by electrolysis of water, or by reforming hydrocarbons. Once produced, hydrogen can be stored as a liquid, a compressed gas, or chemically (bonded within the chemical structure of advanced materials). Hydrogen could release its energy content for use in powering road vehicles by combustion in a hydrogen internal combustion engine or a fuel cell. Fuel cells convert hydrogen and oxygen into water in a process that generates electricity. They are almost silent in operation, highly efficient, and produce only water as a by-product. Hydrogen can produce as little as 5% of the emissions of conventional fuel if produced by low-emission technologies. Closing this section, the way energy policy influences innovation is worthy noticing. Consider the case of the USA (Alic et al., 2003). After Congress mandated CAFE standards for new passenger cars sold in the United States, a lengthy series of incremental innovations followed, affecting nearly all aspects of passenger car design. In little more than a decade, the average fuel efficiency of new cars nearly doubled, to 27.5 miles per gallon. Since 1988, efficiency standards have reduced the average energy consumption of numerous household appliances such as refrigerators, dishwashers, and air conditioners. U.S. energy policy has also incorporated familiar tools of technology policy, such as tax credits for adoption of renewable energy technologies, while it has long avoided energy pricing policies and fuel taxes to encourage energy efficiency. However, it is believed that a substantial boost in gasoline taxes would be a powerful stimulus for innovation in automotive technologies.
Technological Developments in Other Areas Apart from power generation, including transport, technology is seeking solutions also in other implementation areas in order to fight climate change. One such area is agriculture and forestry (Stern Review, 2006, p. 358). Use of policy instruments, including research into fertilizers and crop varieties associated with lower GHG Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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emissions, particularly when combined with higher yields, may substantially help. Another possibility is to enhance carbon storage in soils, a practice with considerable economic and technical potential. Sustainable farming practices suitable to local conditions, while improving crop yields, could also lead to a reduction in GHG emissions. This may be done directly by reducing the need to use fertilizers, and indirectly by reducing the emissions from industry and transport sectors to produce the fertilizer. Sustainable farming practices include agro-forestry, i.e. the practice of planting special types of trees and crops to improve the fertility of the soil. This practice increases crop yields, reduces the need to use synthetic fertilizers that produce GHGs, and enhances the natural carbon absorption of the soil. It also saves emissions because, by improving the soil fertility, the land can be farmed for longer and there will be no need to deforest other land to convert it to agriculture. Other practices include afforestation and planting other crops, which reduces GHG emissions as the biomass grows and sequesters carbon, and forest fire fighting. Technology is also seeking solutions in the area of CO2 capture and storage, which is a challenging option in the portfolio of mitigation actions for the stabilization of atmospheric GHG concentrations (Figueroa et al., 2008; Metz et al., 2007; Tlili et al., 2009). It is a process consisting of the separation of CO2 from industrial and energy-related sources, its transportation to a storage location and its longterm isolation from the atmosphere. Capture of CO2 can be applied to the large point sources of CO2 appearing in Table 1, including large fossil fuel or biomass energy facilities, major CO2-emitting industries, natural gas production, synthetic fuel plants and fossil fuel-based hydrogen production plants. The CO2 would then be compressed and transported for storage in geological formations, in the ocean, in mineral carbonates (e.g. limestone), or for use in industrial processes. Potential technical storage methods are geological storage (in geological formations, such as oil and gas fields, unminable coal beds and deep saline formations (deep underground rock formations composed of permeable materials and containing highly saline fluids), ocean storage (direct release into the ocean water column or onto the deep seafloor) and industrial fixation of CO2 into inorganic carbonates. According to (Metz et al., 2007, p. 3), the net reduction of emissions to the atmosphere through CO2 capture and storage depends on the following: • • • • •
the fraction of CO2 captured, the increased CO2 production resulting from loss in overall efficiency of power plants or industrial processes due to the additional energy required for capture, transport and storage, any leakage from transport and the fraction of CO2 retained in storage over the long term.
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There are different types of CO2 capture systems: post-combustion, pre-combustion and oxy-fuel combustion. The concentration of CO2 in the gas stream, the pressure of the gas stream and the fuel type (solid or gas) are important factors in selecting the capture system. Available technology captures about 85–95% of the CO2 processed in a capture plant. A power plant equipped with a CO2 capture and storage system (with access to geological or ocean storage) would need roughly 10–40% more energy than a plant of equivalent output without CO2 capture and storage, of which most is for capture and compression. For secure storage, the net result is that a power plant with CO2 capture and storage could reduce CO2 emissions to the atmosphere by approximately 80–90% compared to a plant without CO2 capture and storage. To the extent that leakage might occur from a storage reservoir, the fraction retained is defined as the fraction of the cumulative amount of injected CO2 that is retained over a specified period of time. CO2 capture and storage systems with storage as mineral carbonates would need 60–180% more energy than a plant of equivalent output without CO2 capture and storage. Apart from the above, other research and development efforts are underway intended to find new ways to tackle climate change. For example, seeding the oceans with iron may be a viable way to permanently lock carbon away from the atmosphere (Guardian, 2008). Ocean geo-engineering using iron as a fertilize r for microscopic creatures in the ocean is seen as a possible way to slow down global warming. Marine algae and other phytoplankton capture vast quantities of CO2 from the atmosphere as they grow, but this growth is often limited by a lack of essential nutrients such as iron. Artificially adding these nutrients would make algae bloom and, as the organisms grow, they take up CO2. When they die, some of the organisms sink to the bottom of the ocean, taking their carbon with them. But there has been little scientific work previously on whether CO2 stays locked up for a significant period of time. Besides, some environmentalists are concerned that the long-term ecological effects of iron seeding are unknown. Understanding how much iron is needed, how it should be added and what effect it would have on the local ecology is crucial in assessing whether iron fertilization would be a useful tool in reducing CO2 in the atmosphere. In the latest research published in the journal Nature, scientists studied a natural source of iron into the sea near the Crozet Islands at the northern boundary of the Southern Ocean, 1,400 miles south-east of South Africa (Planet Earth, 2009). Their work showed that iron – which is added by the volcanic rocks to the north but not to the south of the island – successfully tripled the growth of phytoplankton and also the amount that sank to the bottom of the sea. CO2, apart from oceans, may be directed to another sink in order to prevent pollution: it may be stored below ground (Brehm, 2007). A new analysis describes a mechanism for capturing CO2 emissions from a power plant and injecting the gas into the ground, where it would be trapped naturally as tiny bubbles and safely Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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stored in briny porous rock. This means that it may be possible for a power plant to be built in an appropriate location and have all its CO2 emissions captured and injected underground throughout the life of the power plant, and then safely stored over centuries and even millennia. CO2 eventually will dissolve in the brine and a fraction will adhere to the rock in the form of minerals such as iron and magnesium carbonates.
The Case of Biofuels A considerable volume of research work during recent years has been directed toward economic, social and environmental impacts of biofuels. The issue has been proven to be quite controversial, as shown in (Petrou & Pappis, 2009), where the pros and cons of using biofuels to substitute conventional fuels is examined. According to the study, the positive impacts of using biofuels include the following (Petrou & Pappis, 2009, pp. 1062-1063): •
•
•
•
The most common positive impact of biofuels is the reduction of the emissions of gases producing the greenhouse effect, particularly CO2 emissions. This is because organisms that biomass comes from during their lives absorb CO2 equal to the amount emitted when biomass (or biofuel produced from it) is burned. However, this consideration is based on several assumptions, which seem to be ignored silently (or their importance diminished) when the impacts of biofuels on the greenhouse effect are determined. Besides, mass production of biofuels (such as biodiesel and bioethanol) can lead to the increase of gases contributing to the greenhouse effect because of the deforestation or clearing of grasslands to be used for biomass cultivation and the use of fossil transportation fuels in the complicated logistics needed for biomass collection and transportation and in biofuels distribution. Probably positive is biofuels impact on SO2 emissions. This is due to the low content of biomass (plants) in sulfur. However, in a complicated supply system of biofuels production, this advantage may be eliminated because of fossil fuels usage in these systems (for biomass cultivation, harvesting, and transportation). Biofuels’ contribution to the nonrenewable sources (fossil fuels mainly) depletion depends upon the net energy ratio (biofuel energy content/ energy consumed for its production and distribution) of each of them. In some cases, biofuels can contribute positively to regional development and sustainability, as in the case of cogeneration power systems through biogas combustion. In any case, biofuels’ contribution to local development and
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sustainability depends upon the type of biomass used (residues or biomass from energy cultivation). The negative impacts of using biofuels, according to the study, include the following (Petrou & Pappis, 2009, pp. 1063-1064): •
•
•
•
•
Today the most serious problem arising from biofuels’ use is the increase of food market prices. This is explained, to some extent, if the decrease of food production because of the increased use of cultivation land for biomass’ production is taken into account. In addition, the agricultural commodities trading in the future market push their prices to rise in an unpredictable way. At the same time, the global demand for food (agricultural food products) is enormous and only partially satisfied. Subsiding biofuels also contributes in the same way, causing food prices to rise because farmers prefer to produce products with certain prices. A similar rise is also observed in the prices of nonfood biomass used as a fuel or as a raw material for biofuels production. Negative impacts from biofuels are also observed in a series of environmental impact categories, such as ozone layer depletion and acidification. More specifically, in some cases, these impacts are worse than those corresponding to fossil fuels. These impacts vary from study to study and depend upon the definition of limits of each system, the cultivation and production methods, etc. Another negative impact concerning the supply chain of solid biofuels production is heavy metal (Pb, Hg, etc) and dioxin emissions. This problem is mainly related with RDFs use as a fuel (but even with virgin biomass under certain conditions) and constitutes a conflict of interest between the various stakeholders. Energy plants are cultivated in an intensive way, in which many pesticides and fertilizers are used. This causes the contamination of surface waters and, as a consequence, problems such as eutrophication and eco-toxicity.
In addition to the above, biofuels’ production and use is connected with specific risks, of which the main ones are the following (Petrou & Pappis, 2009, p. 1064): •
Use of extremely large cultivated land for biomass production to be used as a raw material for biofuels’ production. This large lands’ usage can result in shortages in basic foods, such as corn, cereals, soy, etc, because these are the cultivations most often replaced. The aforementioned risk would be decreased or eliminated only if certain limitations would be set in land use for biofuels’ production.
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•
•
Use of genetically modified organisms (GMOs) in biomass cultivation (genetically modified corn, or soy for example) and in biofuels’ production (as in the case of ethanol production with genetically modified enzymes). This usage can result in the spread of GMOs in natural habitats, certain species extinction, human mutations, etc. The extent of these risks, which have been studied only in the literature, will be practically verified only in the real world (in vivo), and unfortunately, then it will be late. Here, it should be noted that, in the European Union, the GMOs usage is under certain restrictions, but attempts to break them by import companies have been recently uncovered. The development of a large economic sector dealing with biofuels production and distribution, including biomass cultivation, can lead the world into a no return condition. This means that, if the negative impacts of biofuels overcome in fact the positive ones, the results will be of a disastrous global importance. In addition, the existence of such a giant economic sector will affect global economics and businesses in an unpredictable way.
Following the above, a main conclusion of the study is that biofuels, such as biodiesel and bioethanol, seem to be harmful, particularly from a social cost point of view, because they come into conflict of interest with food production. In contrast, the main impacts of some other biofuels, such as agricultural or forest residues, are good enough because they can contribute to regional development in a sustainable way. Another basic conclusion is related to the validity of the biofuels’ life cycle impact assessment (LCIA) results appearing in relevant literature. These results are very often characterized by considerable uncertainty. Also, these LCIA studies rarely include biofuels’ performance in all environmental impact categories (e.g. land use). In addition, the environmental, economic, and social impacts are not combined in an overall performance index. Consequently, the decision making process for the biofuels is not an easy job and produces questionable results. However, despite the above, President Bush in his 2006 State of the Union address, praised the fuel’s potential to curb the nation’s “addiction to foreign oil”, while a joint study by the Departments of Agriculture and Energy concludes that U.S. biomass feedstocks could produce enough ethanol to displace 30% of the nation’s gasoline consumption by 2030 (US Departments of Agriculture and Energy, 2005).
CHANGE OF PREFERENCES AND BEHAVIOR The Stern Review pays particular attention to prescribing policies aimed at removing barriers to climate change mitigation action. The Review considers these policies, particularly in relation to the take-up of opportunities for energy efficiency, and how Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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policies can help to change preferences and behavior. Thus, while it is noted in the Review that carbon pricing and technology development support are fundamental for tackling climate change, even if these measures are taken, barriers and market imperfections may still inhibit action, particularly on energy efficiency. These barriers and failures include: • • • • •
hidden and transaction costs such as the cost of the time needed to plan new investments lack of information about available options capital constraints misaligned incentives behavioral and organizational factors affecting economic rationality in decision-making.
The result of these market imperfections is significant obstacles to the uptake of cost-effective mitigation and weakened drivers for innovation, particularly in markets for energy efficiency measures. The Review prescribes the following policy responses, which can help to overcome these barriers in markets affecting demand for energy (Stern Review, 2006, p. 377): •
•
•
Regulation: Regulation (setting rules and control mechanisms, e.g. banning CFCs in cooling systems) has an important role, for example in product and building markets. This policy may be applied by communicating policy intentions to global audiences, reducing uncertainty, complexity and transaction costs, inducing technological innovation and avoiding technology lock-in (as in the case of lengthy capital replacement cycles), for example where the credibility of carbon markets is still being established. Information: Policies to promote information may include: performance labels, certificates and endorsements, more informative energy bills, wider adoption of energy use displays and meters, the dissemination of best practice, or wider carbon disclosure (e.g. by reporting carbon footprints to investors). Such information helps consumers and firms make sounder decisions and stimulate more competitive markets for more energy efficient goods and services. Financing: Private investment is key to raising energy efficiency. Generally, policy should seek to tax negative externalities (i.e. punish undesirable consequences) rather than subsidize preferable outcomes, and address the source of market failures and barriers. Investment in public sector energy conservation can reduce emissions, improve public services, foster innovation and change across the supply chain and set an example to wider society.
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The Stern Review points out that careful appraisal, design, implementation and management helps minimize the cost and increase the effectiveness of the above policies and measures, while energy contracting can reduce the costs of raising efficiency through economies of scale and specialization. It also draws attention to the fact that fostering a shared understanding of the nature and consequences of climate change and its solutions is critical both in shaping peoples’ behavior and preferences, particularly in relation to their housing, transport and food consumption decisions, and in underpinning national and international political action and commitment. However, governments cannot force this understanding. Instead, they can be a catalyst for dialogue through evidence, education, persuasion and discussion. Governments, businesses and individuals can all help to promote action through demonstrating leadership.
DISCUSSION AND CONCLUSION This chapter has been focused on issues regarding mitigation, i.e. human interventions to reduce the sources or enhance the sinks of GHGs. It was pointed out that immediate and strong action, aiming at stabilizing concentrations of GHGs by drastically decreasing emissions, is the only means to first stop and then revert global warming. Stabilization of concentrations, now standing at around 387ppm CO2 e, compared with only 280ppm before the Industrial Revolution, will require deep emissions cuts. According to the Stern Review, it is estimated that emissions cuts of at least 25% by 2050, and ultimately to less than one-fifth of today’s levels, will cost around 1% of GDP for stabilization levels between 500-550 ppm CO2e (compared to a global warming cost of 20% of GDP implied by “doing nothing”). Emissions have been driven by economic development and are continuously rising, although the relationship between economic growth and development and CO2 emissions growth is not immutable. While North America and Europe have produced around 70% of CO2 emissions from energy production since 1850, most future emissions growth will come from today’s developing countries, because of more rapid population and GDP growth, than developed countries, and an increasing share of energy-intensive industries. Increasing scarcity of fossil fuels alone will not stop emissions growth in time. Atmospheric concentrations of GHGs will continue to rise unless action to combat climate change is taken, related, among others, to redirecting energy-sector research, development and investment away from fossil fuels, towards low-carbon technologies. Stabilization of greenhouse gas concentrations, that is, bringing annual emissions down to the level that balances the Earth’s natural capacity to remove GHGs from the atmosphere requires urgent global action. In the long term, global emissions Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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will need to be reduced to less than 5 GtCO2e, over 80% below current annual emissions, to maintain stabilization. The longer action is delayed, the harder it will become. Specific instruments and climate change mitigation policies are needed, which include carbon pricing, low-carbon and high-efficiency technologies and policies to enhance public understanding of the nature of climate change and to remove the barriers to behavioral change, such as lack of information, the complexity of the choices available, or the cost of mitigation. The Kyoto Protocol, which has significantly contributed to the promotion of such policies, defines specific flexible mechanisms, including Emissions Trading, the Clean Development Mechanism and Joint Implementation. The flexibility provided by the Kyoto Protocol, however, has not been equivocally accepted. While it is argued that Joint Implementation and the Clean Development Mechanism show more promise than international Emissions Trading (Woerdman, 2001), it would be fair to say that the argument for flexibility, pointing to the advantages in terms of economic efficiency, has never been entirely accepted across the climate policy community (Jackson, 2001). Opponents point out that high transaction costs might offset the efficiency gains, while others have rejected the establishment of an international “right to pollute”. It has also been argued that flexibility would reduce the incentive for countries to take domestic action and might compromise the sovereignty of host nations. Ultimately flexibility mechanisms could undermine the environmental aims of the Kyoto protocol altogether. It follows from the above that it is crucial to ensure that the operational design of the flexibility mechanisms is subject to a careful scrutiny. Past and current high-carbon and low-efficiency technological solutions and practices have been responsible, to a big extent, for global warming. Innovative technology with applications put in place of these solutions and practices may greatly help to coping with the global warming problem. The Third Assessment Report (IPCC, 2001) indicates that no single technology option will provide all of the emission reductions needed to achieve stabilization, but a portfolio of mitigation measures will be needed. Research is currently focused on specific technologies, including, among others, power generation technologies, carbon capture and storage techniques, the use of hydrogen to be used particularly in transportation, and biofuels. Prescribing policies aimed at removing barriers to climate change mitigation action and market imperfections may also contribute significantly to tackling climate change. Such policies may include regulation, i.e. setting rules and control mechanisms, promoting information and financing, including both public and private investments for the purpose of raising energy efficiency, reducing emissions and fostering innovation and change. Regulation can prove to be a catalyst of innovation. Regulation of environmental pollutants, in particular, has influenced the development and deployment of many technologies in the USA and elsewhere over recent years. Innovations in automobile Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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engines and electric power plants, for example, have contributed to widespread improvements in air quality (Alic et al., 2003). Regulatory policies will likewise contribute to stabilizing the atmospheric concentrations of GHGs. Environmental policies respond to market failures that leave economic actors with little incentive to reduce activities with adverse effects on society as a whole. Past government policies to redress such problems in the USA relied heavily on “command-andcontrol” regulations that compel polluters to reduce their emissions to specified levels. However, some studies suggest that environmental standards may inhibit innovation, by directing resources to “end-of-pipe” controls rather than technologies that are inherently less polluting. The more recent turn toward “market-based” approaches gives firms greater flexibility, permitting compliance with emissions standards at lower cost. Both types of policies may influence innovation by establishing markets for control technologies as well as by providing incentives and punishments (“carrots and sticks”) to accelerate adoption. The case of sulfur dioxide emissions from electric power plants is worthy mentioning, as it illustrates the influence of regulatory policies on technological innovation and adoption, which resulted in sustained cost and performance improvements in a similar area. Similar sustained cost and performance improvements will be needed for CO2 capture and sequestration technologies to become a cost effective option. As noticed in the Introduction, formulating mitigation policies is, in principle, a case for public entities. Developing a climate change policy can be extremely challenging for government officials. Mitigation actions often face opposition because it is hard to see and value the positive impact of local actions that are intended to have a global effect. Also, the fact that they are intended to prevent future (not current) changes in climate does not favor urgent acceptance. On the other hand, the fact that these mitigation options are in many ways similar everywhere means that there are broad precedents to rely upon (Heinz, 2009). Similarities also may be found in the ways and patterns that different States adopt in order to approach the issue of formulating and implementing mitigation policies. In Europe, for example, striking parallels exist with the case of the United States (Rabe, 2006). The European Union remains formally bound to meeting Kyoto reduction targets, which has led to the launch of the ETS in 2005 and the first volley of cross-national carbon credit trading. However, each EU member state has a different reduction target and is free to establish its own internal policies. This has resulted in a variety of different strategies and degrees of success for individual nations in approaching their targets. Just as some states lead while otherslag in U.S. climate policy development, it is increasingly clear that a similar dynamic operates among European nations. Other countries, e.g. Australia, appear to be following an American pattern, with growing state involvement amid federal disengagement. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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As far as the costs of reducing GHG emissions are concerned, different modeling approaches have been proposed. The Stern Review, in Part III, discusses in detail the very complex issue of how to identify the costs of mitigation, and looks at a resource-based approach to calculating global costs (chapter 9). It also compares modeling approaches to calculating costs, and looks at how policy choices may influence cost (chapter 10). As pointed out in (Tol, 2000), traditionally, there were two approaches for estimating these costs: top-down and bottom-up modeling. The top-down models, dominated by applied energy economists, are smooth and highly aggregate models, as opposed to the bottom-up models, dominated by energy engineers, which are non-smooth and highly disaggregate ones. The main disagreement between the two groups of models was about the efficiency gap: bottom-up models invariably found that the energy system was not optimized and big quantities of carbon emissions could be saved by optimizing it, which was economically viable. In other words, it was possible to save carbon and money at the same time. The topdown models, on the other hand, assumed that the world without policy intervention was efficient. Opportunities to save money would have been taken, should they had existed. Top-down modellers thus initially dismissed the findings of bottomup modellers. However, the initial gaps between top-down and bottom-up models of the costs of emission reduction have largely disappeared. The energy efficiency paradox (the hypothesis that it would be possible to abate GHG emissions and, at the same time, save money) is now partly explained and partly further investigated with the appropriate economic and behavioral research tools. New hybrid models include enough technological detail and are therefore quite realistic. Current research focuses on technological development, one strain of analysis relying on highly aggregate and stylized economic methods, while another on highly disaggregated detailed engineering methods. Finally, in (Stern Review, 2006, Part III, chapter 11) the issue of how climate-change policies may affect competitiveness if they are not applied evenly worldwide is considered.
REFERENCES E4tech. (2006). UK carbon reduction potential from technologies in the transport sector. Prepared for the UK Department for Transport and the Energy Review team. Retrieved February 13, 2009, from http://www.dti.gov.uk/files/file31647.pdf Alic, J., Mowery, D., & Rubin, E. (2003). U.S. technology and innovation policies: Lessons for climate change. Washington, DC: Pew Center on Global Climate Change. Retrieved February 13, 2009, from http://www.pewclimate.org/docUploads/ US%20Technology%20%26%20Innovation%20Policies%20%28pdf%29%2Epdf Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Brehm, D. (2007). Storing carbon dioxide below ground may prevent polluting above. MIT TechTalk, 51(16). Retrieved February 13, 2009, from http://web.mit. edu/newsoffice/2007/techtalk51-16.pdf CDM Statistics. (2009). Retrieved March 10, 2009, from http://cdm.unfccc.int/ Statistics/index.html CDP. (2008). Carbon Disclosure Project, Report 2008, Global 500. Retrieved February 13, 2009, from http://www.cdproject.net/reports.asp Department of Trade and Industry. (2003). Innovation report - competing in the global economy: the innovation challenge. Retrieved February 13, 2009, from http:// www.dti.gov.uk/files/file12093.pdf Ellerman, E. D., & Buchner, B. K. (2007). The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results. In Symposium: The European Union Emissions Trading Scheme. Retrieved February 13, 2009, from http://reep. oxfordjournals.org/cgi/reprint/1/1/66 Europa. (2007a). Climate Change. Retrieved February 13, 2009, from http://ec.europa. eu/environment/climat/home_en.htm Europa. (2007b). UN Climate Change Conference 2007 - Bali, Indonesia. Retrieved February 13, 2009, from http://ec.europa.eu/environment/climat/bali_07.htm Europa. (2007c). UN Climate Change Conference 2008 - Poznan, Poland. Retrieved February 13, 2009, from http://ec.europa.eu/environment/climat/poznan_08.htm European Environmental Agency. (2009). CSI 010 - Greenhouse gas emission trends. Retrieved February 13, 2009, from http://themes.eea.europa.eu/IMS/ISpecs/ ISpecification20040909113419/IAssessment1118392868101/view_content Figueroa, J. D., Fout, T., Plasynski, S., McIlvried, H., & Srivastava, R. D. (2008). Advances in CO2 capture technology - The U.S. Department of Energy’s Carbon Sequestration Program. International Journal of Greenhouse Gas Control, 2(1), 9–20. doi:10.1016/S1750-5836(07)00094-1 Freeman, C. (1992). The economics of hope. New York: Pinter Publishers. Greenfacts. (2007). Scientific Facts on Climate Change - How can governments create incentives for mitigation? Retrieved February 13, 2009, from http://www. greenfacts.org/en/climate-change-ar4/l-2/9-incentives-mitigation.htm#1
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Guardian. (2008). Fertile ground for exploitation. Retrieved February 13, 2009, from http://www.guardian.co.uk/environment/2008/jul/09/carboncapturestorage. carbonemissions Heinz. (2007). A survey of climate change adaptation planning. Washington, DC: The H. John Heinz III Center for Science, Economics and the Environment. Retrieved February 13, 2009, from http://www.heinzcenter.org/publications/PDF/ Adaptation_Report_October_10_2007.pdf IPCC. (2001). The Third Assessment Report. Retrieved February 13, 2009, from http://www.grida.no/publications/other/ipcc_tar/ IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm IPCC. (2007a). Climate change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Report of the Intergovernmental Panel on Climate Change. (S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor and H. L. Miller, Eds.). New York: Cambridge University Press. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg1_report_the_physical_science_basis.htm IPCC. (2007b). Climate change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Annex I – Glossary. Report of the Intergovernmental Panel on Climate Change. (S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. Averyt, M. Tignor and H. L. Miller, Eds.). New York: Cambridge University Press. Retrieved February 13, 2009, from http://www.ipcc.ch/pdf/assessment-report/ar4/ wg1/ar4-wg1-annexes.pdf Jackson, T. (Ed.). (2001). Mitigating Climate Change: Flexibility Mechanisms. Oxford: Elsevier. Kyoto Protocol.(1997). Retrieved February 13, 2009, from http://unfccc.int/resource/ docs/convkp/kpeng.pdf Metz, B., Davidson, O., de Coninck, H., Loos, M., & Meyer, L. (Eds.). (2007). IPCC Special Report Carbon Dioxide Capture and Storage, Summary for Policymakers, A report of Working Group III of the IPCC. Retrieved February 13, 2009, from http://www.ipcc.ch/pdf/special-reports/srccs/srccs_summaryforpolicymakers.pdf Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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OECD. (2006). Do we have the right R&D priorities and programmes to support energy technologies of the future. In 18th Round Table on Sustainable Development (pp. 33-37). Paris: OECD. Retrieved February 13, 2009, from http://www.oecd.org/ dataoecd/48/28/39356629.pdf Petrou, E. C., & Pappis, C. P. (2009). Biofuels: A Survey on Pros and Cons. Energy & Fuels, 23(2), 1055–1066. doi:10.1021/ef800806g Planet Earth. (2009). Effectiveness of iron fertilisation to cool planet questioned. Retrieved February 29, 2009 from http://planetearth.nerc.ac.uk/news/story.aspx?id=305 Rabe, B. G. (2006). Second Generation Climate Policies in the United States: Proliferation, Diffusion, and Regionalization. In H. Selin & S. D. Van de Veer (Eds), Climate Change Politics in North America: The State of Play. Woodrow Wilson International Center for Scholars, Canada Institute, Occasional Series of Papers. Retrieved February 13, 2009, from http://www.wilsoncenter.org/topics/pubs/CI_OccPaper_ClimateChange3.pdf Richels, R. G., & Manne, A. S. (1998). The Kyoto Protocol: A cost-effective strategy for meeting environmental objectives? California: EPRI, Stanford University. Retrieved February 13, 2009, from http://www.oecd.org/dataoecd/38/53/1923159.pdf Stern Review. (2006). Stern Review on the Economics of Climate Change. HM Treasury, Cabinet Office. Retrieved December 3, 2008, from http://www.hm-treasury. gov.uk/stern_review_report.htm Tlili, N., Grévillot, G., & Vallières, C. (2009). Carbon dioxide capture and recovery by means of TSA and/or VSA. International Journal of Greenhouse Gas Control, 3(5), 519–527. doi:10.1016/j.ijggc.2009.04.005 Tol, R. S. J. (2000). Modelling the Costs of Emission Reduction: Different Approaches. Pacific-Asian Journal of Energy, 10(1), 1–7. UNFCCC. (2009). Joint Implementation. Retrieved February 13, 2009, from http:// ji.unfccc.int/index.html US Departments of Agriculture and Energy. (2005). Biomass as feedstock for a bioenergy and bioproducts industry: the technical feasibility of a billion-ton annual supply. Retrieved February 13, 2009, from http://feedstockreview.ornl.gov/ pdf/billion_ton_vision.pdf Voss, J.-P. (2007). Innovation processes in governance: the development of “emissions trading” as a new policy instrument. Science & Public Policy, 34(5), 329–343. doi:10.3152/030234207X228584 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Wikipedia. (2009a). Clean Development Mechanism. Retrieved February 13, 2009, from http://en.wikipedia.org/wiki/Clean_Development_Mechanism Wikipedia. (2009b). Joint Implementation. Retrieved from http://en.wikipedia.org/ wiki/Joint_Implementation Woerdman, E. (2001). Implementing the Kyoto Protocol: Why JI and CDM show more promise than international emissions trading. In Jackson, T. (Ed.), Mitigating Climate Change: Flexibility Mechanisms (pp. 107–116). Oxford: Elsevier. World Resources Institute. (2006). Climate Analysis Indicators Tool (CAIT). Online database version 3.0. Washington, DC: World Resources Institute. Retrieved February 13, 2009, from http://cait.wri.org
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Chapter 7
Business Responses to Climate Change
INTRODUCTION In the previous chapters 5 and 6 the issues of adaptation and mitigation regarding climate change were introduced. Key concepts were defined, several questions were addressed and potential responses and policies were summarized, based on the findings of scientific research, including valuable sources such as (IPCC, 2007) and (Stern Review, 2006). It is particularly interesting to explore how businesses have perceived these issues and, even more important, how they have actually responded to the challenges of climate change. The issue of global warming, with its pervasive impacts on the society and economy, is not only an issue of public policy and, of course, it is not just an academic issue to be discussed among researchers. The extent and ways that businesses participate in world’s efforts to stabilize DOI: 10.4018/978-1-61692-800-1.ch007 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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greenhouse concentrations is of vital importance, as businesses in different sectors of the economy produce large quantities of greenhouse gases (GHGs) and thus have a significant share of the responsibility for the problem. On the other hand, big corporations possess the organizational, technological, and financial resources to cope with environmental problems, including global warming. Indeed, big corporations’ involvement is a critical factor in the policy deliberations relating to climate change, as they are main suppliers of consumers with goods and services as well as main developers and disseminators of new technology. In addition, they implement and finance a substantial part of governments’ climate change policies. It is therefore evident that without businesses’ active participation in tackling global warming, the problem will not be resolved. Businesses are increasingly showing that they recognize the magnitude of the problem and the importance of their role in tackling it. As a confluence of events is forcing governments worldwide to enact limits on the pollutants that are trapping heat in the atmosphere, businesses acknowledge that these trends present enormous risks and opportunities for companies and investors (Cogan, 2006). Corporations’ ability and willingness to monitor and report their activities and issues related to global warming reflect the inexorable rise of climate change from debate at the fringes of society to the boardroom agenda (CDP, 2008). Reports from the business world show that the climate issue is being integrated to an increasing extent into business strategies and operations. However, not all businesses have formally integrated climate change into their agenda, at least not the least proactive and cautious about the world’s future, and theirs as well. An overlook of the history of corporate responses to climate change is presented in (Levy & Jones, 2008), where it is pointed out that, in the U.S., a wide range of sectors responded aggressively to the prospect of regulation of GHG emissions. Indeed, during the 1990s, U.S.-based companies, either individually or through their organizations, were particularly active in challenging climate science, pointing to the potentially high economic costs of GHG controls and lobbying government at various levels. Examples include the Competitive Enterprise Institute (CEI) and the American Legislative Exchange Council (ALEC). Businesses from across the range of affected sectors formed a strong issue-specific organization, the Global Climate Coalition (GCC), to coordinate lobbying and public relations strategies. In SourceWatch (http://www.sourcewatch.org/index.php?title=Global_Climate_Coalition) GCC is characterized as “one of the most outspoken and confrontational industry groups in the United States battling reductions in greenhouse gas emissions. Prior to its disbanding in early 2002, it collaborated extensively with a network that included industry trade associations, “property rights” groups affiliated with the anti-environmental Wise Use movement, and fringe groups such as Sovereignty International, which believes that global warming is a plot to enslave the world under a United Nations-led “world government”. Even after the coalition was Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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disbanded, some members, including the National Association of Manufacturers and the American Petroleum Institute, continue to lobby against any law or treaty that would sharply curb emissions. (http://www.nytimes.com/2009/04/24/science/ earth/24deny.html?_r=2&pagewanted=1&am). U.S. energy and auto companies, in particular, invested little in new technologies that could deliver short- to medium-term reductions in emissions. The European industry, on the other hand, was far less aggressive in responding to the issue and displayed a greater readiness to invest in technologies that might reduce GHG emissions. Senior managers of European companies tended to believe that climate change was a serious problem and that regulation of emissions was inevitable, but were more optimistic about the prospects for new technologies. U.S. companies, by contrast, tended to be more sceptical concerning the science, more pessimistic regarding the market potential of new technologies, and more confident of their political capacity to block regulation. Despite these initial differences, as noted in the above historical overview, by 2000, a convergence in corporate perceptions of the climate issue and their interests could be discerned as key firms on both sides of the Atlantic moved toward a more accommodative position that acknowledged the role of GHGs in climate change and the need for some action by governments and companies. In the oil and automobile industries, companies were beginning to invest substantial amounts in low-emission technologies, and were engaging a variety of voluntary schemes to inventory, curtail, and trade carbon emissions. This chapter addresses the question of how the business world is responding to the challenges of climate change. Some well-known paradigms and collective initiatives will serve as reference of the direction the business world is moving on. Exemplary cases of particular firms will also be referenced. Actually there is adequate evidence regarding the direction and trends characterizing the policies of the business world in relation to global warming. This is particularly true for big corporations. However, these companies act as market leaders not only in how they are doing business in the market place but also in the way they perceive and realize their social role. Therefore they serve as models and show the way to the rest of the business world.
THE CARBON DISCLOSURE PROJECT A Boardroom Agenda As noted in the Introduction, the extent and ways that businesses participate in world’s efforts to stabilize greenhouse concentrations is of vital importance. Indeed, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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businesses in different sectors of the economy are themselves major contributors to the global warming problem, as they have a very big share in GHG production along the supply chain. Also, they determine in many ways how other drivers of climate change contribute to the problem, e.g. by the way they design their products. The way the enterprise sector, through its various supply chain operations like manufacturing, transportation, warehousing etc, is polluting the environment and, more specifically, is contributing to global warming, has been outlined in much detail in chapter 4. In this chapter, it is shown how various enterprises along the supply chain have become environmental friendly, through collective initiatives that are presented in much detail as well as individual endeavors reviewed in small case studies. Businesses that have realized the significance of climate change and its effects, including physical impacts on assets, changes in market dynamics for goods and services, escalation of regulation and greater scrutiny from an increasingly sophisticated range of stakeholders, have undertaken initiatives and established mechanisms to monitor and report the emissions profile of their activities. Such initiatives marked the rise of climate change from debate at the fringes of society to the boardroom agenda. The Carbon Disclosure Project (CDP) is such an initiative, with a mission to facilitate a dialogue between investors and corporations, supported by high quality information from which a rational response to climate change is emerging (CDP, 2008). How important is this project regarding the degree, to which it accounts for world business responses to climate change, becomes immediately obvious from its scope and achievements so far: in its last report, published in 2008, the world’s largest corporations, accounting for 26% of global anthropogenic emissions are monitored and data about their emissions profiles are reported. CDP is an investor coalition, the largest in the world. The organization is based in the United Kingdom and works with shareholders and corporations with the objective to disclose the GHG emissions of major corporations. CDP focuses on individual companies rather than on nations and brings together institutional investors to focus attention on carbon emissions, energy usage and reduction wherever companies and assets may be located. Notice that some corporations have higher greenhouse gas emissions than individual nation states. Some leading companies have moved to become carbon neutral, but for others there is scope to reduce energy usage and GHG emissions, e.g. by adopting energy efficiency methods and improved technology. This section is based, almost exclusively, on the latest CDP’s report published in 2008, the CDP6 report (CDP, 2008). CDP6 is the last (6th) report prepared during the period from 2003, when the 1st report (CDP1) appeared, until 2008. Over the period from CDP1 (2003) to CDP4 (2006) there was a steady increase in the level of total emissions disclosed in the responses of the 500 largest companies in the FTSE Global Equity Index Series covering over 8,000 securities in 48 different Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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countries and capturing 98% of the world’s investable market capitalization, known as Global 500 (read more in the sequel). Between CDP4 (2006) and CDP5 (2007) the total emissions disclosed rose by more than 100%. In the framework of CDP, carbon disclosure is realized through information released by major companies worldwide, responding to relevant questionnaires sent to them by CDP. The CDP annual information request is sent to the Chair of the Board of the world’s largest companies by market capitalization. As noted in chapter 4, CDP provides annual information about the firms that participate in the coalition, covering four principal areas: management’s views on the risks and opportunities that climate change presents to the business; GHG emissions accounting; management’s strategy to reduce emissions/minimize risk and capitalize on opportunity; and corporate governance with regard to climate change. The information request sent to the companies covers all these areas. The responses from companies to CDP’s annual requests for corporate data provide investors with vital information regarding the current and prospective impact of climate change on their portfolios and, therefore, represent an important resource for investment decisions. The fact that CDP’s requests are made on behalf of investors serves to raise the awareness of senior management that climate change is a business issue that requires serious strategic focus.
The Carbon Disclosure Project Methodology In order to assess the emissions performance of companies responding to its questionnaire, CDP is using a set of measures, or scopes. More specifically, emissions used in the context of questions about emissions measurement, management and reporting follow the classification adopted by the Greenhouse Gas Protocol (Greenhouse Gas Protocol, 2009) summarized as follows:
Scope 1. Direct GHG Emissions Companies report GHG emissions from sources they own or control as Scope 1. Direct GHG emissions are principally the result of particular types of activities undertaken by the company. Examples include: (i) the generation of electricity, heat, or steam from stationary sources; (ii) physical or chemical processing; (iii) emissions from the combustion of fuels in company owned/controlled mobile combustion sources; and (iv) emissions that result from intentional or unintentional releases during business operations. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Scope 2. Electricity indirect GHG Emissions Companies report the emissions from the generation of purchased electricity that is consumed in owned or controlled equipment or operations as Scope 2. For many companies, purchased electricity represents the largest component of GHG emissions if they do not have their own on-site power generation capability.
Scope 3. Other indirect GHG Emissions In broad terms, Scope 3 emissions could include: (i) (ii) (iii) (iv) (v)
supply chain emissions from the extraction, production and transport of raw materials and fuels; employee business travel; employee commuting; transport of finished goods and waste products; and emissions associated with product use and disposal.
The definition of Scope 3 emissions is more open to interpretation but provides an opportunity for companies to be innovative in GHG management. In general, the breadth of the scopes, as described above, ensures that the most important, if not all, pollution sources are monitored and relevant data are reported. In CDP6 some additional questions compared to CDP5 have been in the areas of data accuracy and stakeholder/ policymaker engagement. Respondents were also provided with a detailed set of guidance notes highlighting the content that an ideal response to each question might include. The questionnaire is annexed in (CDP, 2008), while the guidance notes are available on the CDP website (www.cdproject.net). A fourth overall measure, the Climate Disclosure Leadership Index (CDLI) is also used, which is produced based on the weighted scoring of companies’ responses to the individual questions in the questionnaire. The CDLI demonstrates the range and depth of carbon disclosure of the companies with the highest scores. The CDLI group is divided in two sub-groups with different reporting requirements (hence different scoring bases): the sub-group of carbon-intensive sectors and the sub-group of the non-carbon-intensive sectors. For CDP6, carbon-intensive sectors have been scored on the basis of all questions, with a total theoretical maximum of 146 points, which is then adjusted to a score out of 100%, while non-carbon-intensive sectors have been scored on the basis of a subset of the questions (only the “minimum requirement”) giving a maximum of 85 points adjusted to a score out of 100%, with extra credit given for comprehensive answers. In CDP6, the range of scores for Leaders in the nonCopyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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carbon intensive sectors is narrower than for Leaders in the carbon-intensive sectors (90-98, against 66-82) suggesting that standards are higher on a more consistent basis in the non-carbon-intensive sectors. However, throughout the Global 500, the quality of disclosure in non-carbon-intensive sectors was much more variable, although the different reporting requirements for the two sector categories make it difficult to draw direct comparisons between their scores. In general, comparisons within different sectors (intensive/non-intensive) are perhaps more meaningful than comparisons across sectors. The CDLI is by no means a static group. All of 2008’s Leaders also responded to the CDP5 questionnaire and, with two exceptions, were also members of the Global 500 in the previous year. However, more than half (35 out of 67) were new entrants to the CDLI compared to the previous year, demonstrating that competition to lead in the race to a low carbon world is intensifying. Finally a fifth index, Intensity, is used as a measure, given in metric tons per million US$, of companies’ emissions performance (see below). The scoring system is based on quantitative and qualitative assessment of responses. In broad terms this takes into account whether a question has been answered at all and an analysis of the extent and quality of the response. Inevitably, there is an inherent element of subjectivity in the scoring. This is mitigated through the provision of detailed guidance on, and through independent reviews and benchmarking of, the scoring process. The scoring system focuses on disclosure, not climate change performance per se. In general, a good score can be achieved by following the guidance issued by CDP and by providing comprehensive responses to individual questions. Particularly good responses are typically both specific and detailed. For example, the following is an example of a response that would attract full points under Question 1(a)(i) “How is your company exposed to regulatory risks related to climate change?”: “The majority of our power plants are subject to the EU ETS. The present NAP II proposals cause an additional financial burden for [company] in the form of insufficient allocation equivalent to 30-40% of needed emission rights.” [Note: the National Allocation Plan (NAP) determines for each UN Member State the ‘cap’ or limit, on the total amount of CO2 that installations covered by the EU Emission Trading System (ETS) can emit (http://www.setatwork.eu/news/n032.htm)]. The European Commission adopted a new set of climate-protection measures for the period from 2013 to 2020. They include binding goals for all EU member states regarding the reduction of GHG emissions and the share of electricity consumption accounted for by renewable energy. But the details of an international or European emissions trading system remain largely unclear. However, we anticipate that costs will be much higher than in the current trading period, which will last until 2012.
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Business Responses to Climate Change 197
We intend to continue reducing CO2 emissions and make our power generation portfolio more flexible by investing in power plants in the future. Furthermore, we limit CO2 risks through climate-protection projects in developing and newly industrializing countries within the scope of the Kyoto “Clean Development Mechanism” (CDM) and “Joint Implementation” (JI). Presently we see no significant pressure arising from national or international targets on demand management. Our investment decisions already include the influence of energy efficiency programs. We believe that gas consumption will be much more affected than electricity consumption. Compared to CDP 5 our views have not changed significantly especially as the uncertainty concerning the period beyond 2012 still prevails”. Where responses score poorly, this is generally because of one or all of the following: • • •
A response does not fully answer the question asked; A response is insufficiently specific to the respondent (i.e. it could apply to any company); A response does not provide relevant data or specific information to support the statements being made.
The CDP6 Findings More than 385 signatory investors, with a combined asset base of $57 trillion, signed CDP’s sixth annual request for information in 2008 (CDP6). The request was sent to over 3,000 companies world-wide. In the same year the organization published the emissions data for 1,550 of the world’s largest corporations, accounting for 26% of global anthropogenic emissions, as mentioned earlier. As stated in the CDP6 report, it had five key aims: •
• • • •
To provide institutional investors and other stakeholders with information that facilitates a better understanding of the risks and opportunities stemming from climate change; To highlight best practice in activities to address climate change across a range of sectors; To benchmark action and disclosure between different geographies and sectors; To analyze key issues in relation to climate change disclosure and to comment on differences in responses geographically and on a sector-by-sector basis; and To use companies’ responses to CDP6 as a way of highlighting key concerns, challenges and future directions around carbon disclosure and wider corporate sustainability.
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198 Business Responses to Climate Change
The report presents the results from the CDLI and offers comments on the comparability of these results with those from CDP5. It also introduces the Global 500 population and its changing composition over time by sector and geography and highlights overall response and disclosure trends. Furthermore, it provides a geographical perspective on the results from CDP6 and presents the bulk of the industry analysis, separating the performance of carbon-intensive and non-carbonintensive industries.
Carbon Disclosure Leadership Index As said earlier, the CDLI is produced based on the weighted scoring of companies’ responses to the individual questions in the questionnaire and it demonstrates the range and depth of carbon disclosure of the companies with the highest scores. The questions for the CDLI scoring are split in 4 groups of questions referring to: (i)
Risks and opportunities (e.g. “how is your company exposed to regulatory risks related to climate change?”), with a total of 30 points available. (ii) GHG emissions accounting (e.g. “identify the total costs in US $ of your energy consumption e.g. from fossil fuels and electric power”), with a total of 52 points available. (iii) Performance (e.g. “does your company have a GHG emissions reduction plan in place? If so, please provide details along with the information requested below. If there is currently no plan in place, please explain why”), with a total of 45 points available. (iv) Governance (e.g. “do you assess or provide incentive mechanisms for including attainment of GHG targets? If so, please provide details”), with a total of 19 points available. Tables 1 (CDP, 2008, p. 10) and Table 2 (CDP, 2008, p. 12) summarize the CDLI for carbon-intensive and for non-carbon-intensive sectors, respectively. In CDP6, the CDLI includes the top 34 companies in the non-carbon intensive sectors and the top 33 in the carbon-intensive sectors (the index is nominally the top 30 in each category, but in both cases several companies are tied for 30th place). 16% of carbon-intensive companies and 11% of non-carbon-intensive companies in the Global 500 are members of the CDLI, reflecting the greater number of noncarbon-intensive companies in the Global 500. It is noticed that, while the CDLI score is a good indicator of how well a company has responded to the CDP6 questionnaire, it does not fully provide a complete picture of companies’ other efforts to provide carbon or wider sustainability disclosure, for example: through corporate responsibility reporting, through environmental statements in annual reports, or Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Business Responses to Climate Change 199
Table 1. Carbon Disclosure Leadership Index for carbon-intensive sectors Sector Chemicals & Pharmaceuticals
Company
CDLI score
Scope 1*
Scope 2*
Scope 3**
Intensity***
BASF
82
23,463
4,050
28,190
346
Bayer
78
3,890
3,710
-69,800
171
Baxter International
74
252
476
162
65
Johnson & Johnson
74
343
580
244
15
Praxair
74
3,168
11,000
260
1,507
AstraZeneca
73
442
276
576
24
Novartis
69
586
883
146
39
Pfizer
67
1,058
1,136
-
45
Dow Chemical Company
66
29,600
7,700
-
691
Construction & Building Products
Lafarge
66
96,166
8,087
2,265
4,318
Manufacturing
Nissan Motor
78
975
1,840
165,468
30
Siemens
77
1,550
2,410
499
35
Renault
73
671
1,021
90,000
30
Suncor Energy
75
10,419
118
-
588
Chevron Corporation
74
63,759
-3,097
-
275
Repsol YPF
72
27,403
1,830
173,180
381
Royal Dutch Shell
68
92,000
13,000
743,180
295
Oil &Gas
Raw Materials, Mining, Paper & Packaging
Transport & Logistics
BHP Billiton
77
21,394
30,626
330,165
1,096
Alcoa
74
31,100
27,900
-
1,919
Rio Tinto
71
29,600
20,600
660,300
1,690
Xstrata
70
14,979
9,135
174
845
Companhia Vale do Rio DoceCVRD
66
13,805
1,417
-
407
Newmont Mining Corporation
66
2,886
983
-
700
Deutsche Post
66
7,050
950
23,260
83
continued on following page
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200 Business Responses to Climate Change
Table 1. continued Sector Utilities
Company
CDLI score
Scope 1*
Scope 2*
Scope 3**
Intensity***
Iberdrola
82
37,769
3,462
1,363
1,616
Exelon Corporation
78
11,000
150
-
589
Scottish and Southern Energy
78
22,724
17
38
751
FPL Group
77
50,000
18,346
18
4,350
Centrica
74
9,562
123
28,300
295
Fortum
74
7,730
408
1,725
1,173
Public Service Enterprise Group
69
24,682
1,146
-
2,009
E.ON
68
121,261
3,286
-
1,323
RWE
67
152,500
34,600
300
3,169
* 000s metric tons ** Any Scope 3 emissions reported, 000s metric tons *** The intensity score has been calculated by summing the Scope 1 and 2 emissions and dividing this by the company’s revenue reported to CDP. Where no revenue figure was given this was taken for 2007 year end from Datastream database. Source: CDP, 2008
through meetings and engagement with stakeholders and policymakers, etc. Also, the CDLI score is not a metric of a company’s performance in relation to climate change management, as it does not take into account levels of emissions, reduction achievements or plans, or carbon intensity in awarding the rating. However, Scope 1 emissions (direct combustion of fossil fuels), Scope 2 emissions (purchased energy), and corresponding carbon intensity (proportional to gross revenues, based on the sum of Scope 1 and Scope 2 emissions) are listed in Tables 1 and 2. Scope 3 (business travel, external logistics/transport, supply chain, product use and disposal) emissions are also stated, although it is recognized that the methods for measuring Scope 3 are at an early stage of development and hence caution should be exercised when comparing these between companies. The average CDLI score for Leaders in the carbon-intensive companies overall was 73 points, which compares with the average for all respondents in these sectors of 52 points. Although each of the carbon intensive sectors is represented in the CDLI, Raw Materials, Chemicals and Utilities are over-represented, highlighting the strong performance of leading companies in these sectors, while Manufacturing, Oil & Gas, Construction and Transport companies are under-represented. The highest scoring carbon-intensive companies in CDP6 are BASF and Iberdrola, each with 82 points. As noted in CDP6, these scores reflect the quality, completeness and comprehensiveness of the climate change disclosures made. From their questionnaire responses, it seems that these companies are making climate change an Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Business Responses to Climate Change 201
Table 2. Carbon Disclosure Leadership Index for non-carbon-intensive sectors Sector Financial Services
Hospitality, Leisure & Business Services
Company
CDLI score
Scope 1*
Scope 2*
Scope 3**
Intensity***
Barclays
98
31
457
78
11
Merrill Lynch & Co.
98
12
365
98
6
Munich Re
98
7
138
42
2
National Australia Bank
98
19
218
14
12
Australia and New Zealand Banking Group
97
14
198
18
20
Citigroup
97
45
1,366
79,666
17
Lloyds TSB
97
30
101
30
6
Royal Bank of Canada
97
11
32
44
2
Wells Fargo and Company
97
42
539
95
15
HBOS
95
41
35
31
2
Westpac Banking
95
7
109
-
5
Royal Bank of Scotland Group
94
92
395
89
8
Standard Chartered
94
11
209
58
20
Credit Suisse
92
17
169
101
5
Allianz SE
91
73
415
221
3
HSBC Holdings
91
109
595
115
8
Bank of Montreal
90
54
96
16
6
Hartford Financial Services
90
36
92
16
5
Taiwan Semiconductor Manufacturing
95
2,466
1,967
3,009
416
Carnival
93
9,858
82
-
763
International Business Machines
92
599
2,266
-
29
Johnson Controls
91
524
1,133
69
48
continued on following page
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202 Business Responses to Climate Change
Table 2. continued Sector Retail & Consumer
Technology, Media & Telecoms
Company
CDLI score
Scope 1*
Scope 2*
Scope 3**
Intensity***
Tesco
96
1,705
2,691
70
42
Coca-Cola Company
93
1,933
3,050
55
173
Matsushita Electric Industrial
91
937
3,020
20,170
43
Sony
91
526
1,546
20,480
23
Colgate-Palmolive
90
244
431
23
49
Diageo
90
604
133
1,505
38
PepsiCo
90
2,332
1,471
-
96
EMC
98
32
232
85
20
Cisco Systems
96
66
479
206
16
Nokia Group
95
13
223
2,297
3
BT Group
94
238
557
22
21
Dell
91
35
403
52
7
* Scopes 1 and 2, or total global emissions where companies reported only a total figure; units in thousand metric tons of CO2-e. ** Disclosed Scope 1 and 2 emissions totals divided by disclosed annual revenue. *** See Chevron response for more detail on how its Scope 2 emissions have been reported. Source: CDP, 2008
integral part of their overall strategy and are planning to benefit from the transition to a low-carbon economy. Both companies had also featured in the CDLI in CDP5, although they did not achieve such a high ranking. At this top end of disclosure, there appears to be little correlation between emissions intensity (measured in terms of CO2-e per unit revenue) and CDLI score: Iberdrola is relatively low in intensity for a utility, and while BASF is much higher intensity than other companies in its sector, it is relatively low-intensity in overall terms. In the non-carbon-intensive sectors, all the Leaders chose to provide comprehensive answers to all the questions, rather than just addressing the minimum requirements stipulated by CDP. As noted in CDP6, this demonstrates a positive, proactive approach to carbon disclosure, and highlights the fact that many companies in non-carbonintensive sectors recognize that carbon is strategically important to their overall value chain, even if their own direct emissions are low. As a result, the Leaders in these sectors have scored very highly, with all 34 companies attaining over 90 points, compared to an average of 69 points for all non-carbon intensive companies in the Global 500. As noted previously, these results are not directly comparable with the scores for companies in the carbon intensive sectors. The composition of the CDLI Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Business Responses to Climate Change 203
by the non-carbon intensive sector is broadly consistent with the composition of the Global 500 as a whole, although with a stronger performance from financial services companies and a weaker performance from technology companies: Financial Services companies have traditionally featured strongly in the CDLI, reflecting the commitment of the sector to carbon disclosure and the strategic importance of climate change to the sector, notwithstanding the relatively low level of their own Scope 1 and Scope 2 emissions. Institutional investors, in particular, increasingly understand that the impact that they have on GHG issues is substantial because of their investment portfolios. The highest scoring companies in this sector were Barclays, Merrill Lynch, Munich Re and National Australia Bank, who all scored 98. The only other company to score 98 points was technology company EMC Corporation. The technology sector is typically an area with relatively low emissions in absolute terms, but with a strong focus on environmental risks and opportunities.
The Global 500 CDP6, in Section 3, introduces the “Global 500” population, i.e. the members of the group of the 500 largest companies in the FTSE Global Equity Index Series. The Global 500 is not a static group. It changes with the market capitalization of companies as well as a result of changing exchange rates. As noticed already, the FTSE Global Equity Index Series covers over 8,000 securities in 48 different countries and captures 98% of the world’s investable market capitalization. As of March 2008, the Global 500 represented companies with a total market capitalization of US$22 trillion, covering all key sectors and regions of the world economy. The CDP6 questionnaire was sent to the Global 500 companies. 417 of these companies were also in previous year’s Global 500, and 336 (81%) of these submitted responses to CDP5. Out of these 417 companies, 343 (82%) responded to CDP6, 22 of them for the first time, indicating an improvement in response rates among established Global 500 companies. Out of the 83 companies that were new entrants to the Global 500, only 36 (43%) submitted responses. In total, 58 companies in the Global 500 this year were reporting to CDP for the first time. The geographical composition of CDP6 Global 500 is as follows: Asia 101, Europe 168, North America 205, rest of world 26. Of these companies, 282 belong to the Non-Intensive and 218 to the Intensive carbon sectors, respectively. Over the period CDP1 (2003) to CDP4 (2006) there was a steady increase in the level of total emissions disclosed in the Global 500 responses. Between CDP4 (2006) and CDP5 (2007) the total emissions disclosed rose by more than 100%. The increase in 2008 was smaller, with total Scope 1 emissions of 2.7 billion metric tons, total Scope 2 emissions of 0.5 billion metric tons and total Scope 3 emissions of 4.2 billion metric tons. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
204 Business Responses to Climate Change
According to the CDP6, these changes reflect a range of factors, including in particular the mix of carbon and non-carbon-intensive companies, organic growth and mergers and acquisitions activity and changes in the emissions intensity of the Global 500, as well as changes in the scope of reported emissions. It is difficult to draw any conclusions from these aggregate statistics on the scale of emissions’ reduction achieved by the Global 500. However, the sector analysis and individual company returns provide some valuable insights. The continuing rise throughout the period covered by CDP is primarily a result of the increase in response and disclosure rates among the Global 500 and the widening of emissions scope, particularly at Scope 3 level. Although CDP has always tracked Scope 3 emissions, companies’ ability and willingness to measure Scope 3 has increased substantially in recent years. Although the total emissions figure is a good way of understanding how the proportion of carbon emitting companies responding to CDP has grown over time, it cannot be taken as an aggregate measure of global carbon emissions: there will be double-counting as some companies’ Scope 2 or Scope 3 emissions are also Scope 1 emissions for other companies (utilities and transport providers in particular).
Geographical Perspective Section 4 of CDP6 provides a geographical perspective on the results obtained from CDP6. The composition of the companies in the Global 500 breaks down as follows: North America accounts for 41% (205); Europe 34% (168); Asia 20% (101) and Rest of World 5% (26). However, in terms of CDP6 respondents from the Global 500, North America and Europe are a slightly higher proportion of the population, at 44% and 37%, respectively, whereas Asia is significantly under-represented at 13%. Rest of world responses is broadly representative at 6%. The variation in geographical composition between the Global 500 and CDP6 respondents is due to marked differences in response rates between the geographies. 88% of Rest of World companies provided submissions, followed by Europe and North America with 83% and 82%, respectively. Of the Asian companies in the Global 500, only 50% provided a response. According to CDP6, analysis of the average CDLI score by geography highlights the fact that the Europeans achieved the highest average score with an overall average of 69 out of a possible 100, closely followed by the Rest of World with an average CDP score of 67 out of 100. The North American CDP population scored an average of 57 and Asia 53. CDP6 offers some explanatory comments for the above results. First, the European result may reflect the relative maturity the climate change issue has achieved in recent years in the region, particularly since pan-European regulation has been in place to regulate emissions since 2005. There has also been recently a significant increase in consumer interest and awareness around climate change. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Business Responses to Climate Change 205
Second, the high average score for the Rest of World countries could be explained by the sectoral mix of respondents with a concentration of companies within the financial services (10 out of 23) and mining (5 out of 23) sectors which, in turn, have been relatively high scoring sectors in CDP6 overall. Third, although awareness of climate change impacts may be high in Asia, the regulatory response to date has been fairly limited. Consequently, the need for companies to take action early is likely to be lower than in Europe and North America. Finally, the result for North America may reflect the current (at the time responses to the CDP6 questionnaire were compiled) political uncertainty and anticipation of possibly greater regulation of emissions in the coming years. Companies may have adopted a wait-and-see strategy in this regard and may have been unwilling to invest significant time and resources into reporting on the climate change agenda at that stage. Clearly, many North American companies are taking action, as represented by their presence within the CDLI, but across the whole North American CDP population the performance is a little more mixed. In addition to average scores across the different geographies, it is also interesting to consider the range of scores. The score profile of European responses is strong, with over 80% scoring in the top half, whereas the North American responses exhibit a broadly normal distribution, with a drop off in scores from 65 to 80. CDP6 respondents in Asia tended to cluster in the mid-range scores.
Industry Analysis Section 5 of CDP6 presents the bulk of the industry analysis, separating the performance of carbon-intensive and non-carbon-intensive industries. The split between carbon-intensive and non-carbon-intensive industries in CDP6 respondents is close to that seen in the Global 500, with response rates comparable for companies irrespective of their emissions. However, there are some differences on an industry-byindustry basis. In particular, Hospitality, Leisure & Business Services and Financial Services companies show relatively poor response rates, whereas response rates for Utilities are particularly strong. The population has been categorized into 11 sectors depending primarily on the nature of their business. Seven of the 11 sectors are carbon intensive sectors: • • • • • • •
Oil & Gas; Utilities; Manufacturing; Construction & Building Products; Raw Materials, Mining, Paper & Packaging; Transport & Logistics; Chemicals & Pharmaceuticals.
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206 Business Responses to Climate Change
The other four of the 11 are non carbon-intensive sectors: • • • •
Financial Services; Retail & Consumer; Hospitality, Leisure & Business Services; Technology, Media & Telecommunications.
CDP6 showed that, as far as score profile by industry is concerned, among carbon-intensive companies, there was a wide range of scoring and significant variance across industries. Very few companies scored below 30 points or over 80. The majority of companies scored 40-70 points, with most Construction companies scoring in the 50-59 range and most Utilities scoring in the 60-69 range. Notably, Transport & Logistics was the poorest-performing sector. For non-carbon-intensive companies, responses showed a far greater variance with fewer obvious peaks, although responses were skewed towards the higher end of the scale. This, according to CDP6, reflects the fact that some companies offered equally full disclosure to that provided by high intensity companies, while others appeared to have a limited understanding of carbon disclosure requirements. Going beyond the intensive/non intensive split, there is surprisingly little correlation between disclosed average emissions and average score within the intensive sector, which is a link that might be expected given the strong pressure from regulators and stakeholders for high intensity companies to report on carbon issues. In particular, Manufacturing performed reasonably well despite its relatively low emissions (although these do not include the Scope 3 emissions such as the use of manufactured products, e.g. cars), while Oil and Gas performed less well despite having high absolute emissions. The two highest-emission sectors, Utilities and Construction, also scored the highest overall scores within intensive industries, suggesting that there may be some correlation at the top end. For Utilities, this is explained by CDP6 primarily by high levels of regulation and consequent stakeholder engagement. However, it is worth noting that this data covers only 61% of carbon intensive companies in the Global 500 (the remainder either did not respond to CDP, or did not disclose emissions). Within non-intensive sectors, the correlation between disclosed emissions and average score is even less significant (although it is worth noting the relatively small difference in average scores across sectors). Retail & Consumer was the lowest scoring sector, but reported the highest average emissions. The Financial Services and Hospitality, Leisure & Business Services sectors reported strong scores despite low and moderate Scope 1 and Scope 2 emissions. However, CDP6 notices that Scope
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Business Responses to Climate Change 207
3 emissions have not been considered due to their inconsistent reporting, and these can be expected to be higher as a proportion of total emissions for a service industry like banks or insurers than an industry that partly involves product manufacturing such as consumer products or IT hardware. It notices also that this emissions data covers only 54% of non-intensive companies in the Global 500 (the remainder either did not respond to CDP, or did not report emissions). Regarding industry emission profiles, according to CDP, it is reasonable to add Scope 1 and Scope 2 emissions together when looking at a particular sector, since they are generally substitutable (e.g. the use of electric or gas heating) and doublecounting would only take place if adding together data for multiple sectors (e.g. Metals and Utilities). Looking at total reported emissions by sector highlights the large contribution made by Utilities and by Oil and Gas companies to total GHG output. The total emissions of the Utilities (1,164 million metric tons CO2-e) and Oil & Gas companies (762 million metric tons CO2-e) that responded to CDP6 exceeded those of respondents from all other industries put together. Referring to Construction, although it is a highly energy-intensive sector, there are fewer construction companies in the Global 500 than there are oil and gas companies or utilities, hence its smaller total output (358 million metric tons CO2-e). In terms of ratios between Scope 1 and Scope 2, CDP6 showed that the more energy intensive a sector, the higher its proportion of Scope 1 emissions. For Utilities and Transport and Logistics companies, Scope 2 emissions are negligible compared with Scope 1, whereas for all four non intensive sectors, Scope 2 makes up the majority of emissions. This suggests that a rise in the proportion of renewable electricity supplied to the grid would serve to improve the Scope 2 and hence total emissions of low-intensity companies significantly, even in the absence of efficiency programs implemented by the companies themselves. Due to the way emissions are reported and the wide variation in methodologies used by companies to identify Scope 3 accounting, no meaningful trends can be identified from the emissions disclosed – it is not possible on a macro level to differentiate between industries with higher-than-average levels of Scope 3 emissions and industries with higher-than-average levels of Scope 3 reporting.
Company Examples In CDP’s site several case studies and testimonials are cited referring to companies and how they benefit from measuring and disclosing their greenhouse gas emissions and climate change strategies, as well as how organizations are using this data (https:// www.cdproject.net/en-US/WhatWeDo/Pages/case-studies.aspx). Among others:
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208 Business Responses to Climate Change
Cisco Systems Inc. As reported at CDP’s site (https://www.cdproject.net/en-US/WhatWeDo/Pages/CaseStudy-Cisco-SystemsInc.aspx), the experience gained from reporting Cisco’s carbon inventory for six years through CDP has enabled the company to establish a robust baseline while improving its data collection. Cisco (www.cisco.com), a leading supplier of networking equipment and network management for the Internet, was in a position to develop a reduction goal after several years of familiarization with the CDP reporting process. During this time, Cisco developed software to permit the collection of energyuse data to become a standard business process. To coordinate a comprehensive emissions calculation covering about 500 buildings in over 80 countries, Cisco engaged and trained over 100 people worldwide to feed data into their custom software. This effort was strongly supported by Cisco’s “EcoBoard”, a cross-functional, executive-level body responsible for Cisco’s environmental vision and strategy, including climate change. Membership of the EcoBoard currently comprises fourteen, key, business units and operational organizations. As part of its base lining process, Cisco confirmed the major sources of emissions were purchased electricity and business air travel. In response, Cisco has created initiatives to leverage its own technology to improve energy efficiency and reduce power consumption in buildings, data centers, and labs, as well as to reduce employee business travel. The company has set a goal to reduce GHG emissions from its worldwide operations by 25% by the end of 2012 based upon a calendar year 2007 baseline. As pointed out in the report, Cisco “views the process as a multi-year journey which began with the decision to start measuring emissions, enabling transparent and public reporting, which formed the basis for an absolute reduction goal. In the future, the company plans to strengthen its data collection by making the process more automated and scalable. Cisco believes that a climate-responsive policy needs to be adopted by every business process, function and employee in order to be successful”.
Walmart Walmart (http://www.walmart.com), the US based leading retail group, decided to use CDP’s process to encourage companies in its supply chain to report climate change related information. The decision is reflected in the CDP Walmart partnership, which was formed in September 2007. Walmart’s supply chain network encompasses more than 60,000 suppliers across hundreds of sectors and the global retailer was the first corporation to work with CDP in order to establish an emissions strategy for its entire supply chain. It is worthy noting that, prior to the partnership, the completion of CDP’s 2006 questionnaire had provided the company with “valuable insight” including the fact that the refrigerants used in grocery stores accounted for a larger percentage of Walmart’s greenhouse gas footprint than its Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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truck fleet. Such insight had served to focus Walmart on the potential for reduction of its “refrigerant footprint”. Walmart recently announced the creation of a sustainability index to bring about a more transparent supply chain. Thus the company will be asking its suppliers to answer 15 questions on the sustainable practices of their companies, around four key areas, including Energy and Climate. According to the report, “Walmart is sending a strong message to its suppliers of the benefits in measuring and reporting greenhouse gas emissions and has selected CDP as the standard system for suppliers to report through. Of the 15 questions in the index, one will ask suppliers if they respond to the Carbon Disclosure Project” (https:// www.cdproject.net/en-US/WhatWeDo/Pages/Case-Study-Walmart.aspx).
EMC For EMC (www.EMC.com), a leading developer and provider of information infrastructure technologies, services and solutions, the process of climate change reporting through CDP has helped to create a baseline which is vital for planning for the future (https://www.cdproject.net/en-US/WhatWeDo/Pages/Case-Study-EMC. aspx). Over time the reporting process has enabled EMC to track strategy development through responses year on year and allows trend analysis which can drive further efficiencies and reductions. Among others, the CDP process is valuable in identifying opportunities for improvement within the business and enables EMC executives to use the data for scenario planning, in order to decide where best to invest resources and funding. It gives a real focus and has led to initiatives focusing, for example, on driving energy efficiencies in remote offices as well as the major campuses, and energy use evaluations distinguishing between the energy intensities of office space vs. labs, data centers and manufacturing spaces etc. According to CDP’s site report, “EMC, by reporting through CDP, explored more deeply the integral link between climate change and its disaster recovery and business continuity products and services – the growing importance of disaster recovery will be driven by increases in extreme weather events, and the process of responding to the CDP revealed the importance of these climate change-related business risks and opportunities”. Other company examples may be found at CDP’s site.
THE CERES REPORT The 100 Companies’ Profiles Apart from the Carbon Disclosure Project, other initiatives have also been undertaken aimed at monitoring and reporting the emissions profile of world businesses. The Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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results of such an initiative have been published by Ceres in a document under the title “Corporate Governance and Climate Change: Making the connection” (Cogan, 2006). Ceres is a U.S. coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change. Ceres (http://www.ceres.org/Page.aspx?pid=415) directs the Investor Network on Climate Risk, a group of more than 50 of the biggest institutional investors from the U.S. and Europe. The report was written and prepared for informational purposes by IRRC (http://www.irrcinstitute.org/), a research firm that has been a source of information on corporate governance and social responsibility issues affecting investors and corporations. The report was intended to be the first comprehensive measurement of how 100 leading global companies are preparing and positioning themselves to face global warming challenges. The report, designed to be used as a benchmarking tool by institutional investors and corporations, pays particular attention to the job that corporate executives and board members are doing to enact well-functioning governance systems to face the climate challenge. 76 U.S. and 24 non-U.S. companies are evaluated regarding the way they are addressing climate change through board oversight, management performance, public disclosure, emissions accounting and strategic planning. More specifically, the report analyzes 100 companies in the 10 most carbonintensive sector industries in America (according to the U.S. Energy Information Agency), which have major operations in the United States and rank among the largest in their industries, based on market capitalization and revenues. The sectors analyzed in the report are:
Energy Sector • • •
Oil & gas (20 companies) Electric power (19 companies) Coal (5 companies).
Industrial Sector • • • • •
Metals & mining (10 companies) Chemicals (10 companies) Forest products (5 companies) Food products (8 companies) Industrial equipment (8 companies).
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Transportation Sector • •
Autos (8 companies) Air transport (7 companies).
Companies were evaluated according to a “Climate Change Governance Checklist”, i.e. a checklist consisting of 14 governance steps that companies can take to proactively address climate change (Table 3). The checklist has been expanded to rank companies on a 100-point scale. Each of the five governance categories carries a different number of maximum points to reflect the number of actions available and their relative importance to the overall score.
The Report Findings According to the report, the U.S. companies profiled provide many positive examples of actions that companies are taking to integrate climate change in their governance practices and strategic planning, particularly in five topics: •
•
•
•
•
Board oversight: Companies like Anadarko Petroleum, Cinergy and Dow Chemical have created climate change task forces to integrate board oversight with executive-level actions to manage GHG emissions. Management execution: The CEOs of companies like Alcoa, Duke Power and United Technologies have become leaders in their industries by articulating the business case for GHG controls and a supportive government regulatory framework. Public disclosure: Companies like DuPont, Ford and Entergy have disclosed their climate risks and opportunities in their securities filings and other public documents. Emissions accounting: Companies like General Motors, Southern and Sunoco have provided detailed public accounts of their GHG emissions that include historical baselines, tracking of emissions savings and projections of future trends. Strategic planning: Companies like Air Products & Chemicals, Edison International and Weyerhaeuser have created business management and product development plans which are poised to seize new opportunities presented by climate change.
According to the results of the report, non-U.S. companies have the highest scores in five of the nine industries which included both U.S. and non-U.S. companies (in the electric power sector, non-U.S. companies were not analyzed). According Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Table 3. Governance steps that companies can take to proactively address climate change Climate Change Governance Checklist: 100 Point System BOARD OVERSIGHT 1 Board Committee has explicit oversight responsibility for environmental affairs. 2 Board conducts periodic review of climate change and monitors progress in implementing strategies.
Points UP to 12
MANAGEMENT EXECUTION 3 Chairman/CEO clearly articulates company’s views on climate change and GHG control measures. 4 Executive officers are in key positions to monitor climate change and coordinate response strategies.
Up to 18
5 Executive officers’ compensation is linked to attainment of environmental goals and GHG targets. PUBLIC DISCLOSURE 6 Securities filings identify material risks, opportunities posed by climate change. 7 Sustainability report offers comprehensive, transparent presentation of company response measures.
Up to 14
EMISSIONS ACCOUNTING 8 Company calculates and registers GHG emissions savings and offsets from projects. 9 Company conducts annual inventory of GHG emissions from operations and publicly reports results.
Up to 24
10 Company has set an emissions baseline by which to gauge feature GHG emissions trends. 11 Company has third party verification process for GHG emissions. EMISSIONS MANAGEMENT AND STRATEGIC OPPORTUNITIES 12 Company sets absolute GHG emission reduction targets for facilities and products. 13 Company participates in GHG trading programs to gain experience and maximize credits.
Up to 32
14 Company pursues business strategies to reduce GHG emissions, minimize exposure to regulatory and physical risks, and maximize opportunities from changing market forces and emerging controls. Source: Cogan, 2006, p. 3
to the report, such international leadership is partly because these non-U.S. companies are based in countries that have ratified the Kyoto Protocol and have begun to implement GHG emissions controls. However, because many U.S. firms also compete in these markets and are subject to the same regulations, geography alone does not account for all of these differences. Other company-specific factors, such as integration of board and management environmental roles, long-term planning cycles and a commitment to sustainability reporting, typically contribute to the industry-leading positions of many non-U.S. companies. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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The report also identifies several industry groups, especially coal, food product and airline companies, some of which appear reluctant to articulate strategies to address the climate change threat. In such companies, emissions improvements are largely outside of the companies’ control and climate change continues to be widely ignored as a governance priority, even though it could have a tremendous impact on their business. For example, many coal companies (especially in the U.S.) have done little to mitigate the financial impacts of carbon regulations, despite managing the world’s most carbon intensive fuel source. Similarly, food product companies have agricultural-based raw materials and water resources at risk, but few have developed a strategy to manage this exposure. And while airline companies are among the world’s fastest growing sources of CO2 emissions, they have the lowest average governance scores among all 10 sectors examined, in part because they are looking mainly to other industries to find technological solutions and achieve emissions improvements (read more in the section “Sectors lagging behind”). The reports points out that, while climate change should be a governance focus of all companies and major industry groups, the risks and opportunities presented by this issue are not distributed evenly. Some companies and industries, by virtue of the types and amount of energy they use or produce, will be better positioned to respond than others. Likewise, some companies and industries, by virtue of the types and location of their businesses and physical assets, will be more vulnerable to changing climatic conditions. Table 4 summarizes the average industry scores attained in relation to the five groups of the14 governance steps used in the checklist. The report classifies the 10 sectors in three groups, high, medium and low scoring industries as follows:
High Scoring Industries •
•
•
Chemical Industry (Average score: 51.9 points). Among the 10 industries evaluated, the chemical sector had the highest overall scores and tied with Auto Industry for the highest Management and with Equipment Industry for the highest Strategies scores. Chemical companies also scored strongly on Board Oversight. Electric Utility Industry (Average score: 48.5 points). The electric utility sector had the highest average Disclosure score of the 10 industries examined, as well as the second-highest Emissions Accounting score and the second highest average score. Auto Industry (Average score: 47.9 points). Auto companies had the highest average Board score, and tied with the chemical industry for the highest average Management score. They also had the third highest Disclosure score.
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Table 4. Average Industry scores Industry
Board
Mgmt.
Disclosure
Emissions
Strategies
Total
Maximum
12
18
14
24
32
100
Chemicals
5.9
9.0
7.7
13.8
15.5
51.9
Electricity
5.5
8.8
8.7
13.7
11.9
48.5
Autos
6.5
9.0
7.9
12.9
11.6
47.9
Equipment
3.0
7.5
5.1
11.2
15.5
42.3
Mining
4.7
8.1
6.2
10.5
12.7
42.2
Forests
4.0
7.8
5.4
9.4
11.0
37.6
Oil & Gas
4.1
6.1
4.9
10.3
9.5
34.8
Coal
1.6
3.6
5.4
5.2
5.6
21.4
Food
1.6
3.2
2.5
5.4
4.9
17.6
Airlines
0.9
3.0
3.7
4.6
4.4
16.6
Average
5.5
8.9
8.7
13.7
11.7
48.5
Source: Cogan, 2006, p. 20
Middle Scoring Industries •
•
•
•
Industrial Equipment Industry (Average score: 42.3 points). Industrial equipment companies tied with chemical companies for the highest average Strategies score, but had weak Board scores. Metals and Mining Industry (Average score: 42.2 points). This industry had above-average overall scores, led by aluminium producers Alcan and Alcoa. U.S. steel companies had among the lowest average industry scores. Forest Products Industry (Average score: 37.6 points). Forest product companies had relatively strong Board, Management and Strategies scores, but weak Disclosure scores. Oil and Gas Industry (Average score: 34.8 points). Oil and gas companies had the widest disparity of responses, with European companies showing strong leadership and many U.S. companies lagging behind, especially U.S. oil refiners and natural gas distributors.
Low Scoring Industries •
Coal Industry (Average score: 21.4 points). The sector has well-below average scores in four of five governance areas, near-average Disclosure score and well below Strategies score.
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• •
Food Products Industry (Average score: 17.6 points). The sector has lowest Disclosure score and low Emissions Accounting and Strategies scores. Air Transport (Average score: 16.6 points). The sector has lowest average score in four of five governance areas and low Management scores (freight carriers have higher scores).
Low scoring industries are discussed in more detail in the sequel (in section entitled “Sectors lagging behind”). Three common governance practices among leadership companies should serve, according to the report, as a model for all firms, regardless of the risk-reward ratio that climate change presents to their particular circumstances: •
•
•
Boards of directors and senior executives work together to address climate change and other sustainability issues. A key challenge for all firms is ensuring that boards are adequately prepared and empowered to focus on GHG reduction and climate mitigation strategies. CEOs embrace climate change as a near-term priority. True leaders are speaking out on climate policy, risks and opportunities, rather than leaving the issue to their successors. Management teams pursue practical solutions to climate change. Rather than waiting for breakthrough technologies, management teams are working to find cost-effective, near-term ways to reduce GHG emissions, starting with energy conservation and more efficient production processes. At the same time, many of these companies are laying the building blocks toward a carbon-neutral economy, with projects focused on carbon sequestration and infrastructure for hydrogen fuels.
The report summarizes governance actions taken by the top-scoring companies in each of the 10 industries examined as follows: •
•
BP (Oil & Gas): BP was the first major oil company to state publicly, in 1997, that the risks of climate change are serious and that precautionary action is justified. The company has cut its operational GHG emissions 10% below 1990 levels, and now aims to hold its emissions steady through 2012. In 2005, BP established an alternative energy business unit that plans to invest $8 billion in solar, wind, hydrogen and combined-cycle power generation technologies over the next decade. DuPont (Chemicals): DuPont’s board of directors has overseen the company’s climate change activities since 1994. The company is committed to reducing its GHG emissions 65% below 1990 levels by 2010 and plans to increase its
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216 Business Responses to Climate Change
•
•
•
•
•
•
usage of renewable energy to 10% of its total by 2010. It is actively engaged in GHG emissions trading and is developing next-generation refrigeration systems, fuel cells, biomaterials, lightweight materials and energy-saving insulation. Alcan (Metals): Alcan created an executive-level steering team in 2001 to embed energy efficiency and GHG emissions reduction goals throughout the company. It achieved 2.9 million tons of GHG reductions in the period 2001–2004. Through recycling programs and the development of energy efficient products, Alcan believes the aluminium industry can become carbon neutral on a life-cycle basis by 2020. AEP and Cinergy (Electric Power): In response to shareholder requests, the board of directors at these power companies agreed in 2004 to produce reports on their climate risk mitigation strategies. Both have targets to reduce GHG emissions and are pursuing development of integrated gasification combined cycle (IGCC) power plants. By gasifying coal to generate electricity and disposing of CO2 emissions underground, these companies believe it is possible to make coal an emissions-free generating source. Toyota (Autos): Toyota formed a company-wide Global Warming Prevention Council in 1998 to meet the CO2 emission targets set by the Kyoto Protocol. That same year, it introduced the Prius, now the best-selling gasoline-electric hybrid vehicle in the world. By 2010, the company plans to offer hybrid options across all of its major model lines. Additionally, Toyota has set a goal to reduce facility emissions by 20% on a sales-weighted basis in the period 2001–2010. General Electric (Industrial Equipment): As part of the “ecomagination” initiative announced in 2005, GE has pledged to achieve a 1% reduction in its GHG emissions from 2004 levels by 2012. GE plans to double its investments to $1.5 billion a year by 2010 in clean technologies, such as wind turbines, high efficiency gas turbines, IGCC power plants, and hybrid diesel-electric locomotives (see also the section “Sectors moving ahead and new opportunities” below). Rio Tinto (Coal and Minerals): Rio Tinto has a Climate Change Leadership Panel and a climate change executive to help coordinate GHG reduction efforts among its business groups. The company is developing “low emissions pathways” for its products to reduce the GHG emissions intensity in coal combustion, metals smelting and electricity use. International Paper (Forest Products): International Paper has an internal committee comprised of senior executives that reviews its climate change policies. This work is overseen by the board’s Public Policy and Environment Committee. The company plans to reduce absolute GHG emissions by 15% in the period 2000–2010. It was the first forest products company to join the Chicago Climate Exchange GHG program.
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Business Responses to Climate Change 217
•
•
Unilever (Food Products): Unilever’s Corporate Responsibility Council oversees the company’s environmental and sustainability policies and performance. The company sets targets for energy efficiency improvements and GHG emission reductions. Unilever places particular emphasis on the use of refrigeration equipment that reduces or eliminates coolants that contribute to global warming. Additionally, the company makes LCAs of the GHG emissions from its products. United Parcel Service (Air Transport): UPS’s Corporate Environmental Affairs Group coordinates the company’s GHG emission reduction strategies. These include increasing the fuel efficiency of aircraft and vehicles, and testing new technologies for use in facilities. UPS maintains a large fleet of alternative fuel vehicles and is deploying hybrid technologies.
EPA CLIMATE LEADERS Climate Leaders is an industry-government partnership in the USA created by the Environmental Protection Agency (EPA) that works with companies to develop comprehensive climate change strategies (http://www.epa.gov/stateply/index.html). Partner companies commit to reducing their impact on the global environment by completing a corporate-wide inventory of their greenhouse gas emissions based on a quality management system, setting aggressive reduction goals, and annually reporting their progress to EPA. Through program participation, companies create a credible record of their accomplishments and receive EPA recognition as corporate environmental leaders. Companies that join the program develop a corporate-wide inventory of the six major GHGs using the Climate Leaders GHG Inventory Guidance. For this, they create and maintain an Inventory Management Plan to institutionalize the process of collecting, calculating, and maintaining a high-quality inventory. Partner companies are called to set an aggressive corporate-wide GHG emissions reduction goal to be achieved over 5 to 10 years. Partners have flexibility in setting reduction goals and work individually with EPA to assess their unique emissions sources and reduction opportunities. They gain credibility by reporting inventory data annually and documenting progress toward emissions reduction goal. EPA provides national partner recognition opportunities and Climate Leaders partner meetings to highlight program participation. In Climate Leaders’ site (http://www.epa.gov/stateply/casestudies/index.html) several case studies from different industries highlight the work of Climate Leaders Partners to reduce their GHG emissions. The case studies reported include industries like manufacturing, automotive, semiconductor, cement, telecommunications,
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financial services, insurance, health services, utilities, retail, hotel service, pharmaceuticals, engineering and real estate.
OTHER GREENHOUSE GAS PROGRAMS The above GHG programs and initiatives are not the only ones undertaken by the business world in order to create a reporting framework or to show where it is moving to regarding its engagement in climate change. Another example of such a program is the Greenhouse Gas Protocol Initiative (Greenhouse Gas Protocol, 2009), a multistakeholder partnership of businesses, non-governmental organizations, governments, and others convened by the World Resources Institute (WRI), a U.S.-based environmental NGO, and the World Business Council for Sustainable Development (WBCSD), a Geneva-based coalition of some 200 international companies drawn from more than 35 countries and 20 major industrial sectors. Launched in 1998, the Initiative’s mission is to develop internationally accepted GHG accounting and reporting standards for business and to promote their broad adoption. The GHG Protocol Initiative comprises two separate but linked standards: •
•
GHG Protocol Corporate Accounting and Reporting Standard, which provides a step-by-step guide for companies to use in quantifying and reporting their GHG emissions and GHG Protocol Project Quantification Standard, a guide for quantifying reductions from GHG mitigation projects (forthcoming).
The Investor Statement on Climate Change launched by the Institutional Investors Group on Climate Change (IIGCC) in October 2006 is also an example of GHG programs (IIGCC, 2007). Participants to this Initiative (asset owners and asset managers of a number of institutional investors with assets over €1.4 trillion) committed to increasing their focus on climate change in their own processes and in their engagement with companies and governments. A key provision of the Statement is that signatories report annually on the actions taken on climate change. In the first annual report (2007) analysing how far signatories have come in taking account of climate change in their activities, among the key findings is that asset owners’ awareness of climate change as an investment issue is high, supported by membership of collaborative initiatives and staff or trustee training. Asset owners are encouraging their investment managers to exercise shareholder voting rights in relation to climate change, to invest in low carbon/clean energy funds and to engage with companies on the issue. Also, both internal and external asset managers are involved in proxy-voting and engaging directly with companies on climate change, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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in particular on improved reporting and disclosure of greenhouse gas emissions and on integrating climate change considerations into business strategies. Another finding is that a large proportion of investment managers are building their capacity to analyse the financial implications of climate change. Sell-side research has been critical, but a wide range of other information sources is also being used. Several investment managers (internal and external) are employing environmental rankings or analysing climate impacts for their portfolio as a whole. According to the report, climate change issues are affecting investment decision-making where investors are exploiting opportunities as a result of government incentives, e.g. renewable energy or low carbon technology, or where government policy has created a price for carbon, as in the EU emissions trading scheme. In addition, climate change is affecting investment decision-making in some sectors where there is the potential for emission trading schemes to be implemented, e.g. US electric utilities. Finally, investors are increasingly willing to engage in the public policy debate on climate change. The dialogue with government is progressive, with investors emphasising the importance of clarity regarding the long-term direction of climate change policy and demanding appropriate policies which provide incentives to reduce greenhouse gas emissions. Collaboration, particularly through the IIGCC, is seen as an effective way to undertake public policy engagement. The report identifies some areas that present challenges for investors and where further progress is possible. In particular, only a limited number of asset owners are formally integrating climate change into their processes for appointing or evaluating fund managers, or request advice on the issue from their investment consultants. Also, there are some issues that investors are not regularly covering in their engagement with companies, e.g. adaptation to unavoidable climate change and climate-friendly product design. Finally, climate change risks and opportunities are not being factored into investment decision-making where the financial implications are not evident, e.g. where there are significant uncertainties about the future direction of climate change policy or where the physical impacts from a changing climate are difficult to quantify. In addition to the above, other GHG programs and initiatives, which are actually using the GHG Protocol mentioned above (Greenhouse Gas Protocol, 2009), include: •
• •
Voluntary GHG reduction programs, e.g., the World Wildlife Fund (WWF) Climate Savers, the Climate Neutral Network, and the Business Leaders Initiative on Climate Change (BLICC) GHG registries, e.g., California Climate Action Registry (CCAR), World Economic Forum Global GHG Registry National and regional industry initiatives, e.g., New Zealand Business Council for Sustainable Development, Taiwan Business Council for Sustainable
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220 Business Responses to Climate Change
•
•
Development, Association des Enterprises pour la Réduction des gaz à Effet de Serre (AERES) GHG trading programs, e.g., UK Emissions Trading Scheme (UK ETS), Chicago Climate Exchange (CCX), and the European Union Greenhouse Gas Emissions Allowance Trading Scheme (EU ETS) Sector-specific protocols developed by a number of industry associations, e.g., International Aluminium Institute, International Council of Forest and Paper Associations, International Iron and Steel Institute, the WBCSD Cement Sustainability Initiative, and the International Petroleum Industry Environmental Conservation Association (IPIECA).
SECTORS MOVING AHEAD AND NEW OPPORTUNITIES Examples of Sectors Moving Ahead In the preceding sections, reference was made to some initiatives undertaken by businesses, which have established mechanisms to monitor and report the emissions profile of their activities. In particular, the findings of the CDR and Ceres reports were presented, which show that significant progress has been made so far by a number of the world’s biggest corporations regarding their carbon emissions profiles. Many such businesses have started employing pro-active policies before being obliged by legislation, have shaped new rules and thus have gained a competitive advantage over their competitors. (Llewellyn, 2007), in a report under the title “The Business of Climate Change - Challenges and Opportunities”, takes a look at these businesses noting that the common thread linking most of the early movers on carbon emissions is that they all have a retail presence (with the exception of insurance, which is special in having to absorb the climate change risks that all other sectors run). In the report, several sectors are cited as moving ahead, including integrated oil, supermarkets, financial services, insurance, infrastructure and communications companies and manufacturing groups and intermediate producers. Integrated oil, in particular, including even big oil companies, which are almost unique among industrial operators in having their own branded retail outlets to sell their products (fuel) and thereby a consuming public to face directly, is the first example mentioned. The case of BP is worthy of special reference among all the sectors’ companies, for its decisive shift in 1997, when it abandoned the Global Climate Coalition (that had been assembled to thwart action against climate change), began to market itself as Beyond Petroleum, and found itself followed by several of its European peers, such as Shell, and a few in the US, including Texaco. But, as the report notes, the trend to carbon reduction and offsetting now stretches right Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Business Responses to Climate Change 221
across retailing. As an example, Targetneutral is a non-profit making programme of BP that gives drivers a simple, practical way to make their own, personal contribution to reducing, replacing and neutralising‚ the harmful CO2 emissions their driving produces. By logging on to www.targetneutral.com, drivers can calculate how much CO2 their car emits, find out how to reduce that figure and also learn more about global projects to minimize CO2. Participating involves a cash contribution to the programme, usually around £20 per year, depending on the vehicle, mileage and fuel consumption. In most countries BP also makes a cash contribution, for every litre of BP fuel purchased (excluding fuel card purchases), by Targetneutral members using loyalty cards. All of BP’s UK fuel tankers and all company cars in Austria, Switzerland and France neutralize their emissions from driving through Targetneutral. The money raised goes towards independently verified emissions reductions projects that reduce or avoid CO2 being released into the atmosphere to offset CO2 emissions produced from Targetneutral members driving emissions (BP, 2009). Another example in the integrated oil sector is Entergy Corporation, an integrated energy company engaged primarily in electric power production and retail distribution operations (Entergy, 2009a). Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity, and is the second-largest nuclear generator in the United States. In 2001, Entergy set a voluntary goal of stabilizing emissions at 2000 levels through 2005, becoming the first electric utility in the country to announce such a target. After meeting that goal, it set a new target in 2006 to reduce GHG emissions from its operating plants and stabilize those emissions at a level 20% below year 2000 levels from 2006-2010. The cumulative CO2 emissions for the two years of 2006 and 2007 were 79.0 tons, 7.2% better than the company’s stabilization goal of 85.1 tons for the same two-year period (Entergy, 2009b). Entergy has also recognized the broader implications of extreme events in developing its contingency plans. While the headquarters building (located next to the New Orleans Superdome) itself was relatively unaffected by Katrina, the devastation in the surrounding area made it impossible for employees to get to work, highlighting for them the importance of adaptive planning. Entergy is working with governments and environmental organizations to preserve Louisiana’s coastal wetlands, which help to blunt the impact of major storms along the state’s coastline (Sussman & Freed, 2008). Supermarkets are another interesting example. Having tried for some time to ‘outgreen’ each other (by, for instance, promoting recycling and reducing packaging) as a way of differentiating themselves to shoppers, rival chains are now undertaking a bigger role in fighting climate change. Thus UK retailers are making efforts to cut down carbon emissions in sourcing and transporting food. The report mentions several chains that have announced a switch from road to less carbon-intensive rail freight in transporting food within the UK. Also several chains choose local UK produce Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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in order to cut down on ‘food miles’ that imported food must travel. However, most supermarkets have failed to take steps to reduce their use of GHGs in their fridges and freezers, particularly hydro fluorocarbons (HFCs) used as coolant in fridge and freezer systems, despite there being more “climate friendly” alternatives, according to a report by Environmental Investigation Agency. About a third of supermarkets’ climate change impact comes from the cooling gases they use and are the biggest users of those gases in the UK. Among the big five chains, Waitrose performed the worst and gave “the impression that they were apathetic and didn’t take the issue seriously”. Tesco, which came second, was revealed as the supermarket with the largest footprint, while even top rated Marks and Spencer was found to be lacking (Energy Saving Trust, 2009). In the financial services sector several companies have announced their intention to go ‘carbon-neutral’ by ‘offsetting’ carbon emissions that they themselves cannot reduce. Thus, HSBC has said that it will plant trees, reduce energy use, and buy ‘green’ power to become carbon neutral at an extra cost to the bank of $7m a year. In 2007, HSBC’s CO2 emissions totalled 897,000 tones. The company purchased the equivalent tonnage in CO2 offsets to remain a carbon neutral company (HSBC, 2009).Carbon reduction and energy efficiency is becoming the mainstream of the capital markets and major investment banks are investing sizeable funds in this area. Insurance is also cited in the report as one of the moving ahead sectors. The financial impact of extreme weather events such as the ones caused by climate change may be eased by the insurance industry, with claims related to natural catastrophes rising twice as fast as general insurance claims. Growing awareness of climate change encourages an increase in insurance cover not only by individuals and companies, but even by governments and international organizations. Companies in the insurance sector are also contributing to the reduction of GHGs. As an example, Allianz has announced that it plans to slash CO2 emissions by 25% by 2012 (Insurance Times, 2009). In addition to the case of Allianz, worthy noticing is the case of the Travelers Companies, Inc., one of the largest providers of personal and commercial property and casualty insurance products in the United States (Travelers, 2009). The company provides a range of personal insurance products, including automobile, homeowners, renters and condominium policies, and coverage for boats and yachts, floods, identity theft protection and valuable items. It also provides a wide array of business insurance services to clients that range from small “main street” businesses to Fortune 100 corporations. The service array includes property and liability coverage, as well as surety and fiduciary products and products tailored to the unique needs of individual industries such as oil and gas, construction, and transportation. The company has for years been proactively looking at options for adaptation to climate change. Thus it formed a number of new internal working groups and expanded the roles of existing groups to address exposure and risk asCopyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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sociated with climate change. The company continues to be engaged in initiatives designed to reduce exposures to extreme weather events for itself and its customers. These actions include providing information and price incentives for insured parties to help mitigate personal and commercial losses due to extreme weather events, reassessing its exposure to risk because of changes in climate, and modifying pricing strategies and policy terms and conditions to reflect updated assessments of current and future risks. Specific actions that Travelers has taken to adapt to climate change include reassessing coastal underwriting practices, updating catastrophe modelling, offering risk control services, redesigning pricing, and engaging in community and government outreach (Sussman & Freed, 2008). In the case of infrastructure and communications companies, BT, one of the UK’s biggest industrial power users, presents a good example cited by the report. In 2004 the company decided to sign up with Npower and British Gas in what it calls “the world’s biggest green energy contract” from renewable or fuel-efficient combined heat and power sources. As a result, BT claims, its CO2 emissions were 70% lower in 2005 than in 1991, while more recently the telecoms giant announced that it has cut emissions in the UK by 58% between 1996 and 2008. Furthermore, it claims that, by using conference calls and home-working, it has saved its employees 315m miles of travel and its own finances some £360m. BT will rely on wind farms to produce a quarter of its UK power by 2016 as part of a major drive to cut CO2 emissions. The company announced, in particular, that it will build the largest wind power project outside of the energy sector as part of a push to slash its 1996 global CO2 emission levels by 80% by 2016. Its wind farms could generate a total of 250 MW of electricity, which would prevent the release of 500,000 tones of CO2 each year compared with coal generation (BT, 2009). Finally, manufacturing groups and intermediate producers face a much more difficult task than do services companies in offsetting all their relatively higher emissions. The report makes reference to Reckitt Benckiser, with many consumer-facing brands in its array of household and health products. The company announced in 2006 that it would plant 2m trees in Canada’s British Columbia, at a cost of several million pounds, to offset the carbon emissions of some 8bn products that it will manufacture in 2006-7. However, the most telling signs of a shift to a low-carbon economy come among those companies that are neither directly affected by regulation (like utilities in Europe) nor have a retail image to burnish (like oil or food companies). The most striking example of this shift is from General Electric, which has put some 40 of its ‘clean technologies’ into what it calls its “Ecomagination programme”, a focus of future R&D spending. It nearly doubled sales of these energy-efficient products from $6.1bn in 2004 to $10.1bn in 2005, and aims at a further doubling by 2010. According to its last Ecomagination Report (Ecomagination, 2007), GE had committed to reducing its GHG emissions 1% by 2012, reducing the intensity of GE’s Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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GHG emissions 30% by 2008 and improving energy efficiency 30% by the end of 2012 (all compared to 2004). Without this action, GHG emissions were predicted to rise substantially by 2012 by approximately 30% based on GE’s projected growth. According to the Ecomagination Report, GE’s GHG emissions from operations in 2007 have been reduced by about 8%, while GHG and energy intensity have been reduced by 34% and 33%, respectively, from the 2004 baseline.
New Opportunities In (Llewellyn, 2007) new technological and business opportunities related to climate change in several sectors, including automobiles, utilities, integrated oil and gas, and chemicals, are presented and discussed. As noticed in the report, recent and rapid technological innovation is stimulating growth in new and existing industries, as markets receive somewhat clearer signals about and draw inferences concerning the long-term growth potential of ‘low-carbon’ products and services. It is of particular importance that, in some cases, technological innovations may not only reduce emissions of carbon, but lead to firms becoming more efficient in the use of all inputs, boosting net profit. More specifically: Automobiles: The report specifies the following main domains in which innovation is likely to be needed: the cutting of emissions of pollutants and CO2 reduction of fuel consumption and development of the use of renewable energies. To meet these objectives, hybrid technologies continue to develop, boosted by increasing fuel efficiency standards in major markets, and rising consumer demand. Alternative fuels, such as biofuels, are gaining increasing attention. A variety of fuel-saving vehicle technologies are expected to enter the market, including hybrid power-trains, cylinder deactivation technology, advanced diesel technology and an array of emerging technologies. OEMs best able to contribute to the production of vehicles with lower carbon emissions are expected to gain global market share and improve financial performance. Utilities: Several trends and opportunities in different industries within the sector are presented in the report. Electric utilities are developing an increasingly diverse array of generating capacities. The development of nuclear power generation and an extended use of renewable energy (solar, wind, and hydroelectricity) are all likely steps in reducing CO2 emissions. The introduction of more efficient methods of power production, such as the development of terrestrial and geological carbon sequestration projects (U.S. Department of Energy, 2009), could lead to significant decreases in generation costs. Integrated oil and gas: The following main domains in which innovation is likely to be needed are specified in the report: improving energy efficiency, promoting cogeneration (simultaneous production of power and steam, for energy conservation Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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and efficiency) and the use of (low-emission) natural gas. Oil and gas companies are increasingly active in technology research and development (e.g. in advanced vehicles and fuel technology, and hydrogen generation technologies). There are also important strategic opportunities in carbon sequestration technology development. Chemicals: Opportunities are created in several areas, as research allows the production of new energy-efficient products. The report makes specific reference to the case of BASF, which has launched a bio-degradable and compostable plastic: it is ideal for trash bags or disposable packaging as it decomposes in compost within a few weeks or in soil without leaving any residues. The new plastic is designed to process like Low Density Polyethylene into films, bags or coatings. It does not require drying and is shelf and warehouse stable for one year (BASF, 2009). Other areas include new processes needed, such as electricity production using photovoltaic cells and biotechnologies, which could increase energy efficiency. The report notices that climate change not only brings technological opportunities, it also enables new businesses to appear and develop as carbon emission offsetting has become a business in its own right. An example is the Carbon Neutral Company, which was established to help other companies measure, reduce, and offset their carbon emissions (Carbon Neutral Company, 2009). Another example is the ClimateSure company, providing car and travel insurance that has the cost of the requisite carbon offset already built into the premium (Climatesure, 2009). Travel insurance products include annual multi trip cover, backpacker cover, single trip travel cover and ski cover. This cheap holiday insurance is targeted to the green insurance customer and offers tailored single trip travel insurance, annual insurance and backpacker insurance at cheap prices. In the same way, Britain’s Co-operative Bank helps its mortgage customers offset the carbon emissions of their houses (Co-operative Bank, 2009).
SECTORS LAGGING BEHIND As noted in the section entitled “The Ceres report”, several low scoring industry groups, especially coal, food product and airline companies, are identified in the report. In Table 5, the bottom twelve firms as rated by Ceres appear (Levy & Jones, 2008). They are all U.S. companies and their rating is based on management and reporting rather than emissions. In particular, regarding the three low scoring industry groups mentioned above, the Ceres report notes the following (Cogan, 2006).
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Table 5. Bottom twelve firms in Governance, rated by Ceres Company
Sector
UAL
Airline
Williams
Oil and Gas
ConAgra
Food
Bunge
Food
Foundation
Coal
Southwest
Airline
Murphy
Oil and Gas
Phelps
Dodge Metals
Arch
Coal
AMR
Airline
PepsiCo
Food
El Paso
Oil and Gas
Source: Levy & Jones, 2008
The Coal Industry Coal is the most carbon-intensive fuel source, accounting for 36% of U.S.’s CO2 emissions (including coal burned to generate electricity). Although the coal industry arguably has more at stake in addressing climate change than any other industry, many companies’ governance responses have been limited or nonexistent. Domestic coal producers have a narrow geographic focus and one main delivery option. This is also true for domestic natural gas suppliers, however, unlike gas producers, coal companies stand to lose much more as a result of carbon emission constraints. Most companies acknowledge that GHG regulations could adversely affect power-sector demand for coal, but otherwise choose to downplay or ignore the issue. According to the Ceres report, the primary strategy being pursued, especially by larger coal companies, in conjunction with government energy agencies and electric utilities, is support of research on technologies to gasify coal and store CO2 emissions underground. Companies pursue this research. However, carbon sequestration technologies have yet to be proven technologically and commercially. Another important, but more limited, commercial option is coal-bed methane recovery.
The Food Products Industry The report points out that, although several leading food products companies acknowledge the threat posed by climate change to food-based raw materials and water Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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resources, few have articulated a strategy to address this threat. While food products are not GHG-intensive, food processing is relatively energy intensive. Despite the remark made above about the sector as a whole, the report notes that many food products companies have taken steps to make their operations more energy efficient. Leading companies like Unilever and Nestle have also focused on GHG emissions from product packaging and refrigeration systems. Some food products companies like ADM and Bunge develop feedstocks for ethanol-based transportation fuels. Biomass fuels could be a boon to the agricultural industry, However, CO2 benefits will come mainly from cellulosic sources (like grasses) that are nearly carbon neutral, rather than corn-based ethanol, which provides about a 20 percent savings in GHG emissions relative to gasoline.
The Air Transport Sector Although aircrafts are among the world’s fastest growing sources of CO2 emissions, expected to reach 5% of global CO2 emissions by 2020, emissions improvements are largely outside of the companies’ control and depend on advances in engine and airframe design, and improvements in airport and air traffic management systems. However, the above scores may be partly misleading. Indeed, as noted in the report, airline profitability is largely dependent on managing fuel costs, giving these companies a built-in incentive to improve the fuel efficiency of their operations. This suggests that many companies have an indirect focus on reducing GHG emissions that may not be reflected in the scores cited. The sector includes freight carriers, which have large ground delivery fleets, with GHG management options available through logistics and fuel alternatives. On the other hand, passenger carriers are more dependent on GHG reductions available through logistical changes in government-controlled air traffic management systems. Obviously, it is mostly in sectors lagging behind in adopting anti-climate change strategies, like the ones appearing above, where opportunities for improvement may be spectacular indeed.
COMPANY EXAMPLES In this chapter, while the discussion was focused on different sectors along supply chains, examples of particular companies have been cited in order to show how the business world is exercising its climate change policies in practice. Many short case studies have been reported in different sections. Some more characteristic examples of companies are cited in this section. Further examples are cited also in the last section (Discussion and Conclusions). Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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The IKEA Group The Group’s climate change policy is exemplified in four areas (IKEA, 2009): •
•
•
•
Energy efficiency and emission reduction: The long term direction is for all IKEA buildings to be supplied with renewable energy generated through energy sources other than fossil fuel. Additionally, the company’s target is to improve its overall energy efficiency by 25% compared with 2005, by using energy-saving light bulbs where possible, will have the lights on only when warehouses are open, and will install extra insulation to save on energy for heating and cooling. Efficient transport of products: This may be the result of shipping furniture in flat packs, resulting in transporting more items on trucks, boats or trains, making fewer journeys, using less fuel and creating fewer emissions. All delivery companies must use “green” vehicles by 2009. Efficient transport of people: Customers and co-workers are provided with the possibility to leave their cars at home and travel to IKEA by public transport. For customers considering using public transport, the company offers a convenient home delivery service. When planning a new store, the issue of good public transport links is an important consideration. Access to existing stores is provided by bus or train. In many cities a free bus service runs to and from stores. All IKEA Group company cars will be “green” by 2010. Climate projects with WWF: The IKEA Group and WWF, the global conservation organization, co-operate on projects aimed at reducing emissions of GHGs associated with IKEA operations, in order to reduce its contribution to climate change. The agreement covers two main areas: increasing energy efficiency and the use of renewable energy at IKEA suppliers, and developing sustainable people transportation.
The Deutsche Post World Net Deutsche Post World Net, the world’s leading logistics group, with its climate protection program “GoGreen”, has set the goal of achieving a 30% improvement in the Group’s (including subcontractors) carbon efficiency by 2020 (Deutsche Post World Net, 2009). That means the carbon footprint of every letter or parcel shipped and every square meter used by almost one-third (compared to the base year 2007). As a first step, the Group is striving to improve carbon efficiency of its operations by 10% by 2012. The following company examples are cited at Pew Center on Global Climate Change’s site referring to “companies leading the way” (http://www.pewclimate. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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org/companies_leading_the_way_belc/company_profiles/). Many more examples are cited in the site.
Exelon Exelon is one of the U.S. largest electric and gas energy companies with more than $15 billion in annual revenues, distributing electricity to more than 5.2 million customers in Illinois and Pennsylvania, and natural gas to approximately 472,000 customers in south-eastern Pennsylvania. The company, through its predecessor companies, has been actively involved in reducing GHG emissions since the mid-1990s as a way to demonstrate that business, and the power generation sector specifically, can begin the transition to a carbon-constrained future today. The company made and met commitments under the U.S. Climate Challenge Program. In May 2005, Exelon established a voluntary goal under the U.S. Environmental Protection Agency’s (EPA) Climate Leaders program. The company committed to reduce its GHG emissions by 8% below 2001 levels by year-end 2008. It has also committed to work with and encourage its suppliers to reduce their GHG emissions. Furthermore, Exelon is incorporating recognition of GHG emissions and their potential cost into its business analyses as a means to promote internal investment in initiatives to reduce carbon emissions. The company has already ceased operations at several of its older, less efficient fossil-fuel plants (http://www.pewclimate.org/ companies_leading_the_way_belc/company_profiles/exelon/).
Alcoa Alcoa, operating at more than 480 locations in 40 countries, is engaged in mining of bauxite, production of alumina and alumina based chemicals, smelting and fabrication of aluminum, forged products and powders, the production of aluminum and plastic packaging materials, automotive components and electrical distribution systems, and the production of high temperature components for turbines, and is a major electric power producer. Alcoa’s GHG reduction target is to reduce GHG emissions by 25% from 1990 levels by 2010, and by 50% when their inert anode technology is fully commercialized. Alcoa Foundation and the Pew Center on Global Climate Change have partnered on Make an Impact - a unique community focused project aimed at raising awareness and mobilizing action on climate change in Alcoa communities, providing the tools and resources for Alcoa employees, their families and local community to understand and manage their individual greenhouse footprint. The program features a dynamic website with tips, tools and resources on how to reduce energy bills and live more sustainably, custom-built carbon calculator featuring best practice individual carbon ‘footprint’ analysis and action planning, and Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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comprehensive outreach program of educational workshops and hands-on activities to support local action and encourage sustainable change (http://www.pewclimate. org/companies_leading_the_way_belc/company_profiles/alcoa/).
Toyota As the world’s second largest automaker, Toyota designs, tests, manufactures, sells, and services vehicles and vehicle components, marketing vehicles in over 170 countries. Its diversified operations include telecommunications, prefabricated housing and leisure boats. The company’s targets include reducing worldwide production CO2 emissions (volume/sales unit) 20% from 2001 levels by 2010. Toyota plants in North America target to reduce energy consumption (per unit of production) by 27% from 2002 levels by 2011 (http://www.pewclimate.org/companies_leading_the_way_belc/company_profiles/toyota/).
ABB The ABB Group is one of the world’s leading engineering companies, operating in around 100 countries and employing about 120,000 people. ABB helps its customers to use electric power efficiently, to increase industrial productivity and to lower environmental impact in a sustainable way. It achieved to reduce energy use (thereby GHG emissions) by 5% from 2005 to 2007, to develop Environmental Product Declarations for core products and to reduce CO2 emissions from operations in Switzerland by 50% compared to 1990 levels. The company continues to reduce energy use (thereby GHG emissions) through 2009 and new goals are expected to be set in 2010 (http://www.pewclimate.org/companies_leading_the_way_belc/ company_profiles/abb/).
Air Products The company serves customers in technology, energy, healthcare and industrial markets worldwide, providing atmospheric gases, process and specialty gases and performance materials and equipment and services. As a gases company with atmospheric gas separation at its core, it has delivered technologies and solutions that have contributed to cleaner air, energy efficiency improvements, and safer products for customers and communities. The company has focused efforts on developing and implementing clean energy technologies with the potential to reduce GHG emissions across the energy supply chain. As a world’s leading producer of hydrogen, it enables refineries to convert a variety of sour crudes into low-sulfur, cleanerburning fuel. Beyond traditional steam methane reforming, it is also involved in a Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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number of projects to produce hydrogen energy from renewable feedstocks. It also has experience supplying massive-scale oxygen systems for solid fuel combustion and oil or coal gasification and has pioneered a suite of carbon capture, purification and compression solutions, including patented oxyfuel technology with the potential for exceptionally high capture rates. The company has engineered nearly 100 hydrogen fueling stations globally in support of a potential future hydrogen economy (http://www.pewclimate.org/companies_leading_the_way_belc/company_profiles/ air_products/).
THE CASE OF SMALL AND MEDIUM ENTERPRISES Small and medium enterprises (SMEs) are a subgroup of businesses that is very important in many respects, including CSR and, more specifically, global warming. In an article entitled “Finding the formula for responsible small companies”, by Mallen Baker (http://www.mallenbaker.net/csr/page.php?Story_ID=1280), the author points out that “SMEs make up around 98 percent of the number of businesses, and therefore they have a huge impact and should be behaving responsibly. This is, of course desirable. But the number of case studies of excellent practice by small businesses is rather limited in number. If the point is that we will only achieve sustainable development by influencing the full base of businesses to follow best practice then this is a venture that is doomed to failure. If CSR is to persuade SMEs to meet a global minimum threshold of environmental emissions, then that is almost certainly going to require political will, backed by legislation”. The author notes that “there are some great examples of SMEs responding to rising social concerns and creating innovative products or service solutions that meet a need. These market niches may be important parts of developing solutions for the future, and SMEs are often faster on their feet and more innovative that some of the larger corporations. But it is still a minority sport”. He concludes by noting that “the simple fact is that CSR should be promoted to SMEs because it represents better business. Small companies can reduce their costs by managing their environmental impact. The more that information on CSR becomes a mainstream part of small business support, the more it will quickly evolve away from the current approach - where it is a slightly simplified version of what is produced for the big corporates - towards something that is practical, hands on, and pretty robust in terms of the business case. Probably, the phrases CSR and sustainability won’t even be used”. SMEs, although they are subject to the effects of climate change, like big companies, and despite their willingness (at least of many of them) to take action on climate change, they do not always have the means for effective responses. As the AFS SME Sustainability Index, a quarterly survey of Australian SMEs has recently Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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shown, out of the 800 companies interviewed, 66% want to take action on climate change, but do not know how. As part of the survey, owners, general managers, chief executives and financial officers of 800 businesses employing five to 200 people in over 14 industries were interviewed to gauge their views on climate change and sustainability practices within their own business. Despite three-quarters of SMEs believing they are environmentally friendly, the survey shows that they are actually doing little to reduce their carbon footprint. The conclusion is that the majority of Australia’s small and medium businesses want to take action on climate change, but feel powerless because they do not know how to do it (http://www.dynamicbusiness. com/articles/articles-news/smes-powerless-on-climate-change4499.html). In another research, the Shell Springboard Report asked 200 SMEs in the U.K. for their views on the business opportunity of products and services that help to reduce greenhouse gas emissions. An overwhelming majority (87%) believed this market presented a significant opportunity for British business in general. 95% expected demand for products and services that helped to reduce GHG emissions to increase over the next decade but far fewer SMEs (around a fifth) were convinced of the opportunity for their own particular business. Two thirds said they knew little or nothing about the issue in relation to their own business. Nearly a fifth said they planned to introduce products or services that helped to reduce green house gas emission in the next five years and three quarters of those who were not planning to do so said this was because they were not relevant to their business. Finally, six out of ten SMEs felt their company was too small to have an impact on climate change, although the clear majority (90%) did believe climate change was a reality (http:// www.management-issues.com/2006/8/24/research/climate-change-an-opportunityfor-smes.asp). In the above research, published in 2006, to look specifically at the impact of climate change and insurance on SMEs in the UK, concentrating on flood risks (although it recognizes that climate change will produce many other threats for small businesses), it is shown that, while 85% of businesses are aware that climate change is a problem for the world, 46% of small businesses think that climate change is blown out of proportion and only 26% think it is a real threat to them. The research is based on insurance data from AXA Insurance, a major insurer of SMEs, combined with a survey of small businesses in recently flooded areas and comments from focus groups of the managers and owners of small companies which have survived recent major floods. The research, notes that while SMEs are the main drivers of job creation, innovation, diversity, and growth in the UK economy, they are also arguably the most vulnerable to impacts from among others, climate change, and the potential effect on SMEs of increasing flood damage and reducing insurance availability could be serious for the economy as a whole. Regarding the specific
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issue of the future impact of flooding on UK SMEs, the research notes that previous surveys of AXA data have shown that, from a sample of 2,420 businesses, some 90% are under insured. And the research concludes that if this is the case, the effect of floods will hit small businesses particularly hard, and in turn the national economy. Several initiatives to help SMEs follow the lead of big business and contribute to tackling climate change have been developed. In particular, measures to help SMEs enhance their role in mitigating climate change are taken by central authorities. Such is the case, for example, of the EU climate change and energy strategy unveiled in January 2008 by the European Commission. UEAPME, the European craft and SME employers’ organization, gave a cautious welcome to the package of measures implementing the EU strategy. As stated in a press release (http://www. ueapme.com/docs/press_releases/pr_2008/080123_climate_energy.pdf), UEAPME “was pleased by the revised code governing State aids for environmental purposes, a significant increase in the allowed aid intensity and a broader, more practical definition of eligible costs”. It said it would accept the principles underpinning the EC proposals to reduce greenhouse gas emissions. The organization supported a broader and stronger Emissions Trading System that foresees the auctioning of quotas, although it warned that compensation measures must be foreseen for some industry sectors in order to offset the losses. It also backed the EC proposals on renewable energy supporting the fact that the EC did not impose any “ideological” hierarchy of renewables, allowing Member States to choose the economically most efficient source at their disposal and to achieve their targets according to their own priorities. It also welcomed the possibility given to Member States to support Europe’s overall renewables effort outside their own borders, which should result in more competition and allow end users to enjoy the best possible prices in the long run. However, “UEAPME stressed that these measures, including possible trading mechanisms, must promote competition and the use of the economically most efficient sources, thereby leading to the best possible prices for end users. In this respect, UEAPME regretted that no mention was made by the EC to decentralized or micro generation schemes, which are particularly helpful to small businesses”. In the case of another initiative referring to the UK’s SMEs, as reported in a communiqué by Carbon Trust (www.thecarbontrust.co.uk), an independent company set up by the UK Government to help companies and organizations reduce carbon emissions through providing help, support and advice, UK’s SMEs are found responsible for half of all business carbon emissions using around 50% of total UK business energy (http://www.carbontrust.co.uk/NR/rdonlyres/6545F676-53D3-4FBA-A2F2585953C6A9EE/0/Energy_Management_launch_event_13Oct05_FINAL.pdf). The role of SMEs is thus characterized as “vital” in the UK’s fight against climate change in Carbon Trust’s communiqué. The organization has worked directly with thousands of small companies through its energy survey and advice programmes Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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and has dedicated significant funds to improving the energy efficiency of the UK’s SMEs. Carbon Trust offers interest-free loans to all small and medium enterprises in the UK that are investing in energy efficient equipment. Many businesses have already made savings of up to 20% through implementing low and no cost measures recommended by the Carbon Trust, making a significant impact on the bottom line. Another example of an initiative to enhance the role of SMEs in fighting climate change, coming this time from the private sector, is Shell Springboard (already mentioned), a programme launched by Shell that provides a financial boost to innovative, low carbon business ideas from across the UK coming from businesses set up as a sole trader, partnership, limited company or community interest company (including university or government spin-outs) that have less than 250 employees and qualify as a small or medium enterprise. The program is looking for business plans for a product or service which will lead to greenhouse gas emissions reductions, is commercially viable and is innovative (http://www.shellspringboard.org/ about/introduction). In another initiative, the site smallbusinessjourney.com, provides a simple six point framework that outlines an approach to environmental sustainability, reduce the environmental footprint and grow SMEs businesses (http://www.smallbusinessjourney.com/Env_Sustainability.asp). In conclusion, SMEs, while having a significant share in the responsibility for creating the conditions for climate change, seem to need help to understand what they can do to help themselves cope with the threats stemming from climate change and to enhance their role in mitigating global warming. They also need expanded support and assistance, financial or other, to adapt to the challenges presented by climate change and take action to cut their carbon emissions.
DISCUSSION AND CONCLUSION In the preceding discussion some well-known paradigms and initiatives have been used in order to show the policies and engagement of the business world regarding global warming. One such initiative is Carbon Disclosure Project. General conclusions drawn from the Project, particularly from the latest report (CDP6) are summarized in the report’s Executive Summary. There it is pointed out that, while the depth and quality of the responses from the world’s largest companies to the latest CDP questionnaire are a measure of shareholder and corporate engagement on the issue of climate change, the responses demonstrate the many positive steps that have been taken by Global 500 companies over the reference year (2008). Climate change, according to CDP6, is becoming a bigger issue for the majority of large
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Business Responses to Climate Change 235
businesses, and companies are keen to share information on their carbon performance and climate risks and opportunities with investors and other stakeholders. It is also pointed out in the report that progress is not uniform, either geographically or by industry sector. Responses have exhibited a wide range of completeness and sophistication. Whilst it has been evident that many companies are devoting significant, senior-level resource to reporting through CDP, some companies failed to recognize this opportunity to engage with a wide range of stakeholders on climate change. A key message is that clearly there will be winners and losers in the transition to a low carbon economy and investors should be concerned about companies who are not able to provide the information they require. Finally CDP6 notices that, while policy makers and negotiators from around the world will be working hard in the immediate future, trying to agree a new global deal on climate change, it is essential that the voice of business and investors is heard clearly in these negotiations, as the corporate sector has a crucial role to play in addressing climate change, through investment and innovation. Similar conclusions may be drawn from the Ceres report (Cogan, 2006). The profiles emerging from the report have shown that many businesses are embracing the new era of climate risk analysis and planning. However, according to the report, serious governance gaps remain, especially among U.S. companies, and the work of all businesses to achieve sustainable wealth in a carbon-constrained world is only just beginning. In another report referred to in this chapter under the title “The Business of Climate Change - Challenges and Opportunities”, integrated oil, supermarkets, financial services, insurance, infrastructure and communications companies and manufacturing groups and intermediate producers are characterized as “sectors moving ahead”. In the same report, new technological and business opportunities related to climate change in several sectors have been presented and discussed. It is pointed out that recent and rapid technological innovation is stimulating growth in new and existing industries, as markets receive clearer signals about and draw inferences concerning the long-term growth potential of ‘low-carbon’ products and services. It is important that there are cases, where technological innovations may not only reduce emissions of carbon, but lead to firms becoming more efficient in the use of all inputs, boosting net profit. The Greenhouse Gas Protocol Initiative (Greenhouse Gas Protocol, 2009) as well as the Investor Statement on Climate Change, launched by IIGCC, have also been briefly presented in this chapter, while reference has been made to a set of other initiatives and GHG programs. All these programs, and others too, have been extensively used by firms in order to quantify and /or report their climate change profiles. Also, several cases of firms have been presented in this chapter, serving as examples of how they are actually exercising their climate change policies in Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
236 Business Responses to Climate Change
practice. These firms are only a small subset of the business world participating in GHG programs or developing their own climate change profile. There are many more. Characteristic of these firms is that they are big corporations with a worldwide presence and share in the market and they represent a big proportion of the world capital assets. Despite the significant progress made so far (along with the CSR movement) and the stories of success referenced in this chapter, global GHG emissions are still accelerating. This, according to some views, constitutes a paradox. According to some other views, however, this is not a paradox and is explained by the fact that most publicized corporate actions are primarily public relations efforts with little substance. Nevertheless, it should be kept in mind that the so-called “paradox” is, at least partly, connected with the inertia characterizing the physical phenomena associated to global warming. More puzzling is the resurgence of corporate political activity in the United States against climate policy initiatives, particularly those emerging at the state level (Levy & Jones, 2008). The U.S. auto industry, despite the introduction of new hybrid models in 2006, continues to oppose raising Corporate Average Fuel Economy (CAFE) standards or their extension to heavier vehicles. The already mentioned cases of the Competitive Enterprise Institute (CEI) and the American Legislative Exchange Council (ALEC) are indicative of this activity against climate policy initiatives, which includes attacking the concept of CO2 as a pollutant or developing model legislation at the state level to limit regulation of GHGs. Characteristic of the movement against climate policy initiatives mentioned above are events, such as the following one cited by SourceWatch (http://sourcewatch.org/index.php?title=Portal:Climate_Change), referring to television ads from a new Montana-based group called “CO2 Is Green”. The group claims that “there is no scientific evidence that CO2 is a pollutant. In fact higher CO2 levels than we have today would help the Earth’s ecosystems.” The ads urge voters to contact their Senators and Representative, “and remind them CO2 is not pollution.” The ads are meant to stoke opposition to climate change legislation. The publication notes that “not surprisingly, the man behind the ads, the lobbying group “CO2 Is Green” and a related “educational” group called “Plants Need CO2” is “a veteran oil industry executive” (http://www.prwatch.org/node/8582). In another similar case cited also by SourceWatch (http://www.prwatch.org/ node/8544), the Consumer Energy Alliance launched an ad campaign supporting tar sands oil. It is noted that tar sand oil is mined and boiled off instead of pumped out of the ground, being some of the dirtiest petroleum on Earth, with three times the GHG emissions of conventional oil. The Alliance is an industry front group backed by the American Petroleum Institute, BP, ExxonMobil, Shell Oil and U.S. Chamber of Commerce. It is running television and radio ads in the Dakotas, Montana and Tennessee opposing low carbon fuel standards, “which would raise the cost of tar Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Business Responses to Climate Change 237
sands oil”. The Consumer Energy Alliance fears a low carbon fuel standard could be reinserted or that states such as Minnesota and California might enact their own. The front group defends tar sands oil, which comes from Canada, as “North American Energy,” and misrepresents the low-carbon fuel standard as a “ban” on “domestic supplies of transportation fuels.” Despite these attitudes by a minority of the business world, the general movement is in favor of action contributing to the climate change mitigation effort. Worthy noting is that many member companies have recently resigned from the U.S. Chamber of Commerce expressing strong disagreement over the climate change issue. For example Pacific Gas and Electric Company (PG&E), a California-based power utility supplying power from gas, nuclear, renewable energy and some coal-fired sources, has resigned recently (September, 2009) from the U.S. Chamber of Commerce over what the utility’s chairman and CEO described as “fundamental differences” over climate change policy. PG&E’s resignation was sparked by moves by the Chamber of Commerce to challenge a determination by the U.S. EPA that greenhouse gases from motor vehicle emissions endanger public health and welfare. At about the same time, following requests from a group of investors, Nike resigned its position on the board of directors of the U.S. Chamber of Commerce, while FPL Group announced it will buy three wind power projects from Babcock & Brown Power for just over $350 million (http://www.greenchipstocks.com/articles/nike-climatechange/521). A plethora of other top firms have also left or have announced that they are resigning from the U.S. Chamber of Commerce or the National Association of Manufacturers in protest to what some executives characterized as “extreme” climate change position of these organizations, including Apple, Exelon, Johnson & Johnson, Duke Energy Corp., PNM Resources Inc., etc. At the same time, twentyfive companies, including General Electric Co., Caterpillar Inc. and Dow Chemical Co., have joined with environmental groups in the U.S. Climate Action Partnership to promote cap-and-trade legislation. Most of the companies remain members of business associations that oppose the measure (http://www.bloomberg.com/apps/ news?pid=20601130&sid=au4dgEfKQBXo). This chapter has been concluded by making explicit reference to SMEs, which have a significant share in the responsibility for creating the conditions for climate change, and whose participation in the fight against global warming is of vital importance. SMEs, however, seem to need help to understand how to cope with the threats stemming from climate change and to enhance their role in mitigating global warming. For this, they need support and assistance.
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REFERENCES BASF. (2009). Ecoflex® Biodegradable Plastic. Retrieved February 27, 2009, from http://iwww.plasticsportal.com/products/ecoflex.html BP. (2009). Targetneutral - Cutting vehicle CO2 emissions. Retrieved February 27, 2009, from http://www.bp.com/sectiongenericarticle.do?categoryId=9011548&co ntentId=7021085 BT. (2009). BT to cut CO2 emissions by 80 per cent. Retrieved February 27, 2009, from http://networks.silicon.com/telecoms/0,39024659,39239796,00.htm Carbon Neutral Company. (2009). Retrieved February 27, 2009, from http://www. carbonneutral.com/ CDP. (2008). Carbon Disclosure Project, Report 2008, Global 500. Retrieved February 27, 2009, from https://www.cdproject.net/CDPResults/67_329_143_CDP%20 Global%20500%20Report%202008.pdf Climatesure. (2009). Retrieved February 27, 2009, from http://www.climatesure. co.uk/ Co-operative Bank. (2009). Retrieved February 27, 2009, from http://www.cooperativebank.co.uk/servlet/Satellite/1193206375355,CFSweb/Page/Bank Cogan, D. G. (2006). Corporate Governance and Climate Change: Making the Connection. Retrieved February 27, 2009, from http://www.ceres.org//Document. Doc?id=90 Crichton, D. (2006). Climate Change and its effects on Small Businesses in the UK. AXA Insurance UK. Retrieved February 27, 2009, from http://www.axa.co.uk/aboutus/corporate_publications/climatechange_docs/AXA%20Climate%20Change.pdf Deutsche Post World Net. (2009). Retrieved February 27, 2009, from http://www. dpwn.de/dpwn?tab=1&skin=hi&check=yes&lang=de_EN&xmlFile=2009786 Ecomagination. (2007). 2007 Ecological report. Retrieved February 27, 2009, from http://ge.ecomagination.com/site/downloads/news/2007ecoreport.pdf Energy Saving Trust. (2009). Supermarkets’ greenhouse gas emissions criticised. Retrieved February 27, 2009, from http://www.energysavingtrust.org.uk/Resources/ Daily-news/Climate-change2/Supermarkets-greenhouse-gas-emissions-criticised
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Entergy. (2009a). Retrieved February 27, 2009, from http://www.entergy.com/ Entergy. (2009b). Sustainability report. Retrieved February 27, 2009, from http:// www.entergy.com/content/our_community/pdfs/Sustainability_Report_07.pdf HSBC. (2009). Retrieved February 27, 2009, from http://www.hsbc.com/1/PA_1_1_ S5/content/assets/csr/hsbc_sustainability_report_2007.pdf IIGCC. (2007). Investor Statement on Climate Change Report 2007. Institutional Investors Group on Climate Change. Retrieved February 27, 2009, from http://www. iigcc.org/docs/PDF/Public/FirstInvestorStatementonClimateChangeReport.pdf IKEA. (2009). Retrieved February 27, 2009, from http://www.ikea-group.ikea. com/?ID=709 Insurance Times. (2009). Allianz to slash CO2 emissions 25% by 2012. Retrieved February 27, 2009, from http://www.insurancetimes.co.uk/story.asp?storycode=375914 IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm Levy, D. L., & Jones, J. H. (2008). Business strategies and climate change, United States. Encyclopedia of Earth. Retrieved March, 16, 2009, from http://www.eoearth. org/article/Business_strategies_and_climate_change,_United_States#History_of_ Corporate_Responses_to_Climate_Change Llewellyn, J. (2007). The Business of Climate Change, Challenges and Opportunities. Retrieved February 27, 2009, from http://www.cs.bc.edu/~muller/teaching/ cs021/lib/ClimateChange.pdf Protocol, G. H. G. (2009). The Greenhouse Gas Protocol, A Corporate Accounting and Reporting Standard. Revised Edition. World Business Council for Sustainable Development and World Resources Institute. Retrieved February 27, 2009, from http://www.ghgprotocol.org/files/ghg-protocol-revised.pdf Stern Review. (2006). Stern Review on the Economics of Climate Change. HM Treasury, Cabinet Office. Retrieved December 3, 2008, from http://www.hm-treasury. gov.uk/stern_review_report.htm Sussman, F. G., & Freed, J. R. (2008). Adapting to climate Change: A Business Approach. Prepared for the Pew Center on Global Climate Change. Retrieved February 27, 2009, from http://www.pewclimate.org/docUploads/Business-Adaptation.pdf
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Travelers. (2009). Retrieved February 27, 2009, from http://www.travelers.com U.S. Department of Energy. (2009). Carbon Sequestration project Portfolio. Retrieved February 27, 2009, from http://www.fossil.energy.gov/programs/sequestration/ publications/programplans/2006/project_portfolio_sequestration_06.pdf
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Coping with Uncertainty and Risk 241
Chapter 8
Coping with Uncertainty and Risk
INTRODUCTION In the previous chapters, reference has been made to the uncertainty, which characterizes measurements and assessments related to climate change, and the risks accompanying policies to adapt to and/or mitigate the impacts of global warming. Particularly in the case of the facts, based on (IPCC, 2007a), about global warming and relevant projections into the future presented in chapter 2, the presence of uncertainties is strong (Stainforth et al., 2005; Meinshausen, 2006). The same is true in the case of the global warming impacts presented in chapter 3. On the other hand, it is obvious that such uncertainties, coupled with other uncertainties stemming from sources related to society and economy, imply that any policy to adapt to and/
DOI: 10.4018/978-1-61692-800-1.ch008 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
242 Coping with Uncertainty and Risk
or mitigate the impacts of global warming is accompanied with some degree of risk, and the outcome of such a policy will be, to a bigger or lesser degree, uncertain. At the national level, as pointed out in a report by the Institutional Investors Group on Climate Change (IIGCC, 2006), although many countries have announced national long-term climate targets and have started to implement strategies relating to energy and environmental policy, and despite the significant progress on policy frameworks, policy uncertainty remains a significant issue. Apart from scientific uncertainties related to the magnitude of climate change and how changes in climate will translate into impacts on human society, policy responses are also uncertain, including the degree of political support for action on climate change, the specific policy instruments that will be used and the sectors that will be targeted. These uncertainties imply that it is difficult for companies and investors to predict the likely implications of policy for their investments. (IIGCC, 2006) referring to one of the critical issues for any company, namely competitiveness, and how this affects the decisions made by policymakers, cites the example of Phase 1 of the EU Emissions Trading Scheme (EU ETS) for the period 2005-2007, where a number of countries over-allocated emissions, and where the majority of countries ensured that companies or sectors exposed to international competition were given most or all of the allowances that they required. Specific sources of uncertainty mentioned include the degree of government support for international policy action on climate change over the short and long-term and whether there will be a post-Kyoto international regime and whether this will involve setting greenhouse gas emission reduction targets for participating countries. Such considerations in view of the global recognition of the deteriorating climate and its impacts due to the greenhouse effect may seem rather too pessimistic. However they contribute to the uncertainties characterizing company decision-making. In addition, other sources of uncertainty include, according to (IIGCC, 2006), the specific policy instruments (e.g. command and control regulation, taxes, emissions trading, subsidies, etc) to be used by governments, and how these will influence the cost of greenhouse gas emissions, the degree of government commitment at the national level to action on climate change, the timing of policy responses and the relationship between climate policy goals and other policy goals such as energy security and diversity of supply. Risk is generally related to opportunities and threats. It is only natural, therefore, that risk connected with climate change, in particular, has attracted the attention of the business world, which has realized its importance for investors and enterprises, as discussed above. Information regarding a company’s business threats and opportunities resulting from climate change, as well as the company’s efforts to address them, are important for investors, who require this information in order to analyze the company’s status and perspectives and compare it with other companies and investment options. In October 2006, a group of leading institutional investors from Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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around the world released the Global Framework for Climate Risk Disclosure, a new statement on disclosure that investors expect from companies (Climate Risk Disclosure Initiative, 2006a). The group took the initiative having realized that “climate risk disclosure is a burgeoning field, as companies, investors, governments, and civil society increasingly understand the risks and opportunities that climate change poses for companies and investors” and after continuing discussion regarding activities to enhance climate risk disclosure, through the communication networks of existing investor groups focused on climate change, including the Institutional Investors Group on Climate Change (IIGCC) mentioned above, the Investor Network on Climate Risk (INCR), and the Investor Group on Climate Change. The Framework encourages standardized climate risk disclosure to make it easy for companies to provide and for investors to analyze and compare companies. More specifically, four elements of disclosure are defined in the Framework. These should be applied through existing reporting mechanisms, such as Mandatory Financial Reports, the Carbon Disclosure Project, the Global Reporting Initiative, etc. The elements of disclosure are: • • • •
Total historical, current, and projected greenhouse gas emissions Strategic analysis of climate risk and emissions management Assessment of physical risks of climate change Analysis of risk related to the regulation of greenhouse gas emissions.
The rational behind the above investors’ initiative as well as their concerns may be inferred from the following statement: “Given the sweeping global nature of climate change, climate risk and opportunity is embedded in the operations of all companies. Some companies with significant emissions of GHGs or energy use face current or future regulatory risks, while climate change may pose a range of physical or financial risks to other firms. These risks may include operational risk, market risk, liabilities risk, policy risk, regulatory risk, and reputational risk”. The statement makes reference also to indirect risks: “In some cases, the risks to companies may be indirect. For example, even if a company is not directly subject to regulations, significant emissions in its value chain may still result in increased costs (upstream) or reduced sales (downstream). Climate change also represents significant opportunities for many firms. Some companies will develop profitable new technologies or markets as governments pursue innovative strategies to address climate change and spur technology development”. The release of the Global Framework for Climate Risk Disclosure was accompanied by another document where the text of the Global Framework, details on “How to Report” using existing disclosure mechanisms, and examples of disclosure from leading corporations using these disclosure mechanisms are reported (Climate Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Risk Disclosure Initiative, 2006b). In this document, it is pointed out that, as a result of the sweeping global nature of climate change, climate risk and opportunity is embedded in the operations of all companies. However, different companies may be faced with different risks. These risks may be classified in seven different categories, namely, operational risk, physical risk, market risk, liabilities risk, policy risk, regulatory risk, and reputational risk. In Table 1 a set of risks’ categories are correlated with different industrial sectors (Climate Risk Disclosure Initiative, 2006b, p. 2). Thus, while all sectors are subject to physical risks dependent on location or to both reputational risks and opportunities, some of them (like the Electric Power or the Manufacturing sectors) are running particular risks (e.g. regulatory). In this chapter, approaches regarding how to cope with risk and uncertainty in policy making, particularly in a climate change context, are presented. Before doing so, the terms “risk” and “uncertainty” should be discussed. In Annex I (Glossary) of the Fourth Assessment Report of IPCC (IPCC, 2007), the term “uncertainty” is defined as “an expression of the degree to which a value (e.g. the future state of the climate system) is unknown”. It is pointed out that uncertainty can result from lack of information or from disagreement about what is known or even knowable. Uncertainty may have many types of sources, from quantifiable errors in the data to ambiguously defined concepts or terminology, or uncertain projections of human behavior, therefore it can be represented by quantitative measures (for example, a range of values calculated by various models), or by qualitative statements (for example, reflecting the judgment of a team of experts). More specifically, as explained in (IPCC, 2007, p. 120), uncertainties can be classified in several different ways according to their origin. Two primary types are value uncertainties and structural uncertainties. The former arise from the incomplete determination of particular values or results, for example, when data are inaccurate or not fully representative of the phenomenon of interest and are generally estimated using statistical techniques and expressed probabilistically. Structural uncertainties arise from an incomplete understanding of the processes that control particular values or results. This is the case, for example, when the conceptual framework or model used for analysis does not include all the relevant processes or relationships, and are generally described by giving the authors’ collective judgment of their confidence in the correctness of a result. In both cases, estimating uncertainties is intrinsically about describing the limits to knowledge and, for this reason, involves expert judgment about the state of that knowledge. A different type of uncertainty arises in systems that are either chaotic or not fully deterministic in nature and this also limits the ability to project all aspects of climate change. The simple typology of uncertainties, which appears in Table 2, is included in the “Guidance Notes for Lead Authors of the IPCC Fourth Assessment Report on Addressing Uncertainties” issued in July 2005, intended to assist them to deal with Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
√
√
√
√
√
Physical Risk (dependent on location)
Competitive, Reputational Risk
Regulatory Opportunity
Technological Opportunity
Competitive, Reputational Opportunity √
√
√
√
√
√
Manufacturing
Source: Climate Risk Disclosure Initiative, 2006b
√
Regulatory Risk
Electric Power
√
√
√
√
√
√
Auto & Transportation
√
√
√
√
√
√
Oil & Gas
√
√
√
√
√
√
Forestry
√
√
√
√
√
√
Agriculture
Table 1. Categories of risks correlated with different industrial sectors
√
√
√
Fisheries
√
√
√
HealthCare
√
√
√
Real Estate
√
√
√
Tourism
√
√
√
√
√
Water
Coping with Uncertainty and Risk 245
uncertainties consistently (IPCC, 2005, Table 1, p. 1). They address approaches to developing expert judgments, evaluating uncertainties, and communicating uncertainty and confidence in findings that arise in the context of the assessment process.
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246 Coping with Uncertainty and Risk
Relevant to uncertainty is the term “likelihood”, particularly the likelihood of an occurrence, defined in the Glossary as “an outcome or a result, where this can be estimated probabilistically”. Likelihood refers to a probabilistic assessment of some well-defined outcome having occurred or expected to occur in the future. Another term, also relevant to uncertainty, is “confidence”, in particular the level of confidence in the correctness of a result. A level of confidence can be used to characterize uncertainty that is based on expert judgment as to the correctness of a model, an analysis or a statement. The Guidance Notes made a distinction between levels of confidence in scientific understanding and the likelihood of specific results. This would allow authors to express high confidence that an event is extremely unlikely (e.g., rolling a dice twice and getting a six both times), as well as high confidence that an event is about as likely as not (e.g., a tossed coin coming up heads). More specifically, Table 3 considers both the amount of evidence available in support of findings and the degree of consensus among experts on its interpretation (IPCC, 2005, Table 2, p. 3). The terms defined in the table are intended in a relative sense to summarize judgments of the scientific understanding relevant to an issue, or to express uncertainty in a finding where there is no basis for making more quantitative statements. Coming to the term “risk”, this is not defined in Annex I (Glossary) of the Fourth Assessment Report of IPCC. Note that this Report includes only information and analyses of natural facts related to climate change. It does not deal with relevant decision analysis and policy issues. Risk, which is a term connected with decision
Table 2. A simple typology of uncertainties Type
Indicative examples of sources
Typical approaches or considerations
Unpredictability
Projections of human behavior not easily amenable to prediction (e.g. evolution of political systems). Chaotic components of complex systems.
Use of scenarios spanning a plausible range, clearly stating assumptions, limits considered, and subjective judgments. Ranges from ensembles of model runs.
Structural uncertainty
Inadequate models, incomplete or competing conceptual frameworks, lack of agreement on model structure, ambiguous system boundaries or definitions, significant processes or relationships wrongly specified or not considered.
Specify assumptions and system definitions clearly, compare models with observations for a range of conditions, assess maturity of the underlying science and degree to which understanding is based on fundamental concepts tested in other areas.
Value uncertainty
Missing, inaccurate or non-representative data, inappropriate spatial or temporal resolution, poorly known or changing model parameters.
Analysis of statistical properties of sets of values (observations, model ensemble results, etc); bootstrap and hierarchical statistical tests; comparison of models with observations.
Source: IPCC, 2005
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Coping with Uncertainty and Risk 247
analysis, is referenced extensively in the Stern Review, though (Stern Review, 2006). Section 2.5 of Part I of the Review, in particular, discusses risk and uncertainty, noting that the risks and uncertainties around the costs and benefits of climate policy are large, hence the analytical framework should be able to handle risk and uncertainty explicitly. It is pointed out that uncertainty affects every link in the chain from emissions of GHGs through to their impacts. Indeed, there are uncertainties associated, for example, with future rates of economic growth, with the volume of emissions that will follow, with the increases in temperature resulting from emissions, with the impacts of these temperature increases and so on. Similarly, there are uncertainties associated with the economic response to policy measures, and hence about how much it will cost to reduce GHG emissions. Regarding risk, the Review notes that the distinction between uncertainty and risk is an old one, going back at least to Knight (1921) and Keynes (1921). In their analysis, risk applies when one could make some assessment of probabilities and uncertainty when one does not have the ability to assess probabilities. In the case of presence of uncertainty, facts may not establish probabilities but they may destroy certainty, thus calling for the application of a “precautionary principle”. This means that the lack of established probabilities does not imply inaction; instead, facts may provide grounds for precautionary action. Thus, while the ability to work with probability distributions in the analysis of climate change is demonstrated in the Review (chapter 1), there is genuine uncertainty over which of these distributions should apply. In particular, science and economics are particularly sparse precisely where the stakes are highest, that is, at the high temperatures that are known that they may be possible. Apart from the above contribution of the Stern Review, several definitions of risk and hazard given by different authors may be found in (Adger et al., 2004, Table 3, p. 32).
Level of agreement or consensus →
Table 3. Qualitatively defined levels of understanding High agreement Limited evidence
…
High agreement much evidence
…
…
…
Low agreement Limited evidence
…
Low agreement much evidence
Amount of evidence (theory, observations, models) →
Source: ΙPCC, 2005
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248 Coping with Uncertainty and Risk
HANDLING UNCERTAINTY AND RISK The main source about facts concerning global warming, which have been presented in chapter 2 of this book, has been the Fourth Assessment Report of IPCC. In order to address uncertainties characterizing such facts, the “Uncertainty Guidance Note provided for the Fourth Assessment Report” referenced in the introductory section of this chapter had been issued, intended to assist lead authors of the Report on addressing uncertainties, particularly to deal with uncertainties and confidence consistently, by defining common approaches and language that could be used broadly across all IPCC working groups (IPCC, 2005). The Guidance Notes compliment material and more detailed coverage of relevant issues available in the guidance paper on uncertainties developed for the Third Assessment Report (Moss & Schneider, 2000) and the report of an IPCC Workshop on Uncertainty and Risk (Manning et al., 2004). The Guidance Notes address approaches to developing expert judgments, evaluating uncertainties, and communicating uncertainty and confidence in findings that arise in the context of the assessment process. It should be kept in mind that the working groups’ reports would assess material from different disciplines and would cover a diversity of approaches to uncertainty, reflecting differences in the underlying literature. As noted in the Guidance Notes, the nature of information, indicators and analyses used in the natural sciences is quite different from that used in the social sciences. IPCC Working Group I focus on the former, Working Group III on the latter, and Working Group II covers both. Therefore, issuing of the notes was necessary. Use of the appropriate level of precision to describe findings was recommended in the Guidance Notes and a consistent language for assessing the existing level of understanding on key issues was provided (Table 2), where qualitative levels of agreement or consensus are related to amount of evidence. It was also suggested that levels of confidence might be used to characterize uncertainty based on expert judgment as to the correctness of a model, an analysis or a statement (Table 3). Thus qualitatively calibrated levels of confidence were defined, corresponding to respective quantitative degrees of confidence in being correct. Finally, the term “likelihood” was defined (Table 4), referring, as already said, to a probabilistic assessment of some well defined outcome having occurred or expected to occur in the future. The categories defined should be considered as having ‘fuzzy’ boundaries. Likelihood might be based on quantitative analysis or an elicitation of expert views. The standard terms used in the Uncertainty Guidance Note to define qualitatively calibrated levels of confidence and the likelihood of an outcome or result, where this can be estimated probabilistically, are as given in Tables 4 (IPCC, 2005, Table 3, p. 3) and 5 (IPCC, 2005, Table 4, p. 4), respectively. Note that, in the Fourth Assessment Report, the terms ‘extremely likely’, ‘extremely unlikely’ and ‘more likely than not’ have been added to the terms (levels) for likelihood used in the IPCC Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Table 4. Qualitatively calibrated levels of confidence Terminology
Degree of confidence in being correct
Very High confidence
At least 9 out of 10 chance of being correct
High confidence
About 8 out of 10 chance
Medium confidence
About 8 out of 10 chance
Low confidence
About 2 out of 10 chance
Very low confidence
Less than 1 out of 10 chance
Source: IPCC, 2005
Uncertainty Guidance Note and appearing in Table 5. The reason is to provide a more specific assessment of parameters, including radiative forcing and attribution (attribution, particularly in the case of causes of climate change, which varies continually on all time scales, is the process of establishing the most likely causes for climate change with some defined level of confidence). Also, unless noted otherwise, values given in the Fourth Assessment Report are assessed best estimates and their uncertainty ranges are 90% confidence intervals (i.e., there is an estimated 5% likelihood of the value being below the lower end or above the upper end of the range). In some cases the nature of the constraints on a value, or other information available, may indicate an asymmetric distribution of the uncertainty range around a best estimate. A valuable treatment of global warming related policies, particularly for the handling of risk and uncertainty, is made in the Stern Review (Stern Review, 2006). Indeed, extensive reference to the role of uncertainty and risk in designing policies to address global warming, both for adaptation and mitigation, is made in the Stern Review, the second main source (next to the Fourth Assessment Report of IPCC) of citation of this book. Particularly in Part I of the Review, it is very common to Table 5. Likelihood scale Terminology
Likelihood of the occurrence/outcome
Virtually certain
> 99% probability of occurrence
Very likely
> 90% probability
Likely
> 66% probability
About as likely as not
33 to 66% probability
Unlikely
< 33% probability
Very unlikely
<10% probability
Exceptional unlikely
<1% probability
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accompany projected impacts to economy and society and policies suggested to address global warming (related to climate change facts and their projections into the future) with uncertainty estimates, often measured quantitatively. According to the Stern Review, climate change and climate modelling are subject to inherent uncertainties. Starting with the warming effect of GHGs (radiative forcing, see chapter 2), it is noted that the rate of annual increase in greenhouse gas levels in recent years is characterized by uncertainty (up to 10%). The same holds for uncertainties in climate projections and in estimating climate sensitivity. Uncertainty is expressed about several facts and projections related to climate change, such as changes in rainfall in the tropics, the dynamics of the ice sheet, etc. In particular, several studies provide a probabilistic framework to climate projections. Their outcome is a series of probability distribution functions that aim to capture some of the uncertainty in estimates made (Stern Review, 2006, Part I, p. 9). Uncertain facts and projections have as a consequence that climate change impacts on economy and society may be projected correspondingly with considerable uncertainty. In addition, coupled with other parameters, related to economy and society, such uncertainties generate risks regarding the possible outcome of actions taken in order to adapt to or mitigate climate change. An example of the impact of uncertainty in estimating the outcome of such actions is the case of using the discounting method, particularly the choice of discount rates, applied in order to make comparison of alternative actions possible. As noted in the Review, the uncertainties are considerable, both about the potential size, type and timing of impacts and about the costs of combating climate change. Hence the framework used must be able to handle risk and uncertainty. The analysis of risks in models and policy analyses designed to investigate specific questions is crucial to the problem of climate change and such analyses should be built around the economics of risk (Stern Review, Technical Annex to the Postscript, p. 3). For example, in the case of high-climate scenario, the 95th percentile estimate (the threshold for the upper extreme) is a 35.2% loss in global per-capita GDP by 2200. According to this scenario, the global mean temperature increases to 4.3°C in 2100. This scenario is characterized by market impacts, i.e., impacts of climate change to the output produced, risk of catastrophe because of natural disasters, i.e. storms, flooding etc, and non-market impacts, i.e., direct impacts on the environment and human health (chapter 6 of Stern Review). The above percentage loss is not a statistical mean, but it is nevertheless a risk that few would want to ignore. Such risks can have a strong effect on welfare calculations, because they reduce consumption to levels where every marginal dollar, euro or pound has a much greater value. As noted in the Stern Review (Stern Review, 2006, Part I, p. 23), climate change is a result of the externality associated with GHG emissions. Indeed, it entails costs that are not paid for by those, who create the emissions, and has a number of feaCopyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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tures that together distinguish it from other externalities. Such features shape the economic analysis, which must be global, deal with long time horizons, have the economics of risk and uncertainty at its core, and examine the possibility of major, non-marginal changes. In particular, climate change has the following features: • • • •
It is global in its causes and consequences; The impacts of climate change are long-term and persistent; Uncertainties and risks in the economic impacts are pervasive. There is a serious risk of major, irreversible change with non-marginal economic effects.
The Review points out that the impacts of climate change are very broad ranging and interact with other market failures and economic dynamics, giving rise to many complex policy problems involving uncertainty and demanding the deployment of ideas and techniques from most of the important areas of economics, including many recent advances, in order to analyse them. Such dynamics and uncertainty are explored in chapters 13 (Part III) and 14 (Part IV), while analyses involving risk are taken further in Sections 2.5 and 2.6 and in chapter 6 of the Review. In particular, in chapter 13 (Part III) of the Stern Review, it is pointed out that, while measuring and comparing the expected benefits and costs over time of different potential policy goals can provide guidance to help decide how much to do and how quickly, analysis can only suggest a range for action as a result of the nature of uncertainties involved combined with the ethical issues raised. It is stressed that uncertainty is an argument for a more, not less, demanding goal, because of the size of the adverse climate change impacts in the worse case scenarios. Furthermore, section 14.4 of chapter 14 (Part IV) of the Stern Review explores the policy implications of the significant risks and uncertainties surrounding both the impacts of climate change and the costs of abatement. It concludes that a longterm quantity ceiling or stabilization target should be used to limit the total stock of GHGs in the atmosphere. Finally, in chapter 6 of the Review, it is pointed out that the challenge of modeling the overall impact of climate change, which involves forecasting over a century or more, as the effects appear with long lags and are very long-lived, sets limitations to our ability to model over such a time scale. Such limitations demand caution in interpreting results but projections can illustrate the risks involved. Policy here is about the economics of risk and uncertainty. The Stern Review has made extensive use of integrated assessment models, which attempt to summarize the impacts of climate change, usually in terms of aggregate gains or damages in terms of income. It is noted that, although modelling of the economic impacts of climate change over very long time horizons cannot give precise Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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results and is very sensitive to assumptions, it allows the investigation of the role of different specifications of model structure and ethical assumptions. As pointed out in the Technical Annex to the Postscript, such models are highly speculative, but they have the advantage of exploring the logic of assumptions and give an idea of the magnitude of risks, their evolution over time and sensitivity to emissions.
DECISION FRAMEWORK APPROACHES TO UNCERTAINTY AND RISK As said in the previous section, uncertainty has been treated extensively by IPCC, particularly in its Fourth Assessment Report. The Stern Review, on the other hand, has treated, apart from the issue of uncertainty, also that of risk, both in the framework of climate change. Apart from these two references, uncertainty and risk management under this framework has been extensively studied and relevant decision tools are suggested and recommendations are made by several authors. For example, (Bui et al., 2008) have developed a risk-focused performance management system planning framework for organizations undergoing externally-driven regulatory change that constrains their operating environment and increases business and operating risk exposure. In (Suarez et al., 2008) the authors study Southern African institutions involved in disaster management and faced with two major new threats, namely the HIV/AIDS pandemic higher risk of extreme events and disasters due to climate change. They highlight implications of declining organizational capacity for climate change adaptation and formulate recommendations. In (Jones, 2001) an environmental risk assessment/risk management framework to assess the impacts of climate change on individual exposure units identified as potentially vulnerable to climate change is presented. The framework is designed specifically to manage the systematic uncertainties that accompany the propagation of climate change scenarios through a sequence of biophysical and socio-economic climate impacts. In (World Bank Group, 2006), emerging lessons from World Bank Group operations including country and regional examples are presented and the issue of risk transfer is discussed. Finally, in (Hellmuth et al., 2007) several case studies presenting experiences of climate risk management in African countries are cited, lessons learned are presented and recommendations are made. In the next chapter, chapter 9, several tools developed to assist in decision analysis under climate change will be extensively presented. These tools are of the widest applicability, may serve as decision analysis frameworks for both the public and the private sectors and, of course, address the issues of uncertainty and risk, as they are very important and even critical in decision analysis under climate change. In
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this section these decision analysis frameworks will be presented from the point of view of their approaches to uncertainty and risk.
The UNEP Framework The “Handbook on Methods for Climate Change Impact Assessment and Adaptation Strategies” (UNEP, 1998), referred to as the UNEP framework in the sequel, is an initiative developed by the United Nations Environment Programme (UNEP) intending to help conducting a variety of climate impact and adaptation studies for a variety of circumstances. The UNEP framework recognizes that analysis of climate change adaptation measures involves a number of analytical challenges including scientific and economic uncertainties, data limitations, and the need to evaluate issues that may not readily be conceived of in monetary terms. The UNEP framework does not give explicit definitions of either uncertainty or risk. It recommends, however, several approaches, which can be used, in conjunction with quantitative analyses of adaptation measures, to address uncertainty and risk. Each of these approaches provides insight into the relevance of uncertainty in a decision about whether or not to implement a specific adaptation measure. The analyst can begin with the least resource-intensive approaches (e.g., meta-analysis, sensitivity analysis) and can use the results of these analyses to determine whether more sophisticated approaches (e.g. probabilistic approaches) are warranted. The approaches recommended are the following (UNEP, 1998, p. 134, adapted from Hurd et al., 1997, and Hobbs et al., 1997): 1.
2.
3.
Sensitivity analysis. This is the process of determining whether variations in input values significantly alter the output values (net benefits), i.e., determining whether the decision has characteristics, which suggest that climate change or other sources of uncertainty could be relevant. Use of scenarios. According to this approach, a limited set of scenarios, that is “plausible input values and their associated outcomes (net benefits)”, are generated. Evaluating a measure under both “worst case” and “best case” scenarios can illustrate whether uncertainty is important to the final decision or not. Switch-point analysis. This approach is used to identify the conditions that would be necessary to alter a decision regarding whether or not to implement an adaptationmeasure. The analysis seeks answers to questions such as “how much would climate need to change to make an adaptation measure the preferred alternative?” or “if a decision were made assuming no climate change, but global warming occurred anyway, would the potential loss of net benefits be significant enough to alter a choice of adaptation measures?”. A decision
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254 Coping with Uncertainty and Risk
4.
5.
maker can then evaluate this information against subjective probabilities posing questions such as “how likely is it that such a climate change will occur?”. Decision analysis under uncertainty. In order to evaluate alternative measures when the probabilities associated with various inputs or outcomes are unknown, this approach applies decision criteria such as “maximax” (maximizing the payoff by selecting the adaptation with the largest potential gain) or “minimax” (minimizing the maximum regret by avoiding the most damaging outcome). Decision analysis under risk. According to this approach, a decision criterion (e.g., maximize the expected payoff) is used in conjunction with subjective probabilities or probability distributions for the inputs of the analysis (e.g., risks, values, costs) in order to evaluate the payoffs from alternative measures. This analysis can be presented in a payoff matrix or a decision tree. If delaying implementation of adaptation measures is feasible, the benefits of waiting a decade or longer for better information could be evaluated using Bayesian analysis.
The UK Climate Impacts Programme Framework One of the most valuable frameworks that may help decision-makers and their advisors to take account of the risk and uncertainty associated with climate variability and future climate change and identify and appraise measures to mitigate the impact or exploit the opportunities presented by future climate is the UK Climate Impacts Programme framework (Willows & Connell, 2003). It was published under the title “Climate Adaptation: Risk, Uncertainty and Decision-making” in 2003 and is structured in two parts, one of which (Part 2) provides framework-supporting material regarding aspects of risk assessment in general, or risk-based climate change impact assessments in particular. The framework provides a Glossary where, among others, definitions of uncertainty and risk may be found. Uncertainty is defined as “a characteristic of a system or decision where the probabilities that certain states or outcomes have occurred or may occur are not precisely known”. It is characterized as a concept that reflects a lack of confidence about something, including forecasts. Uncertainty describes the quality of knowledge concerning risk and may affect both the probability and consequence components of the risk. Risk, on the other hand, is defined as “a characteristic of a system or decision where the probabilities that certain states or outcomes have occurred or may occur are precisely known”. Risk is a combination of the chance or probability of an event occurring, and the impact or consequence associated with that event. According to the above definition, decisions under risk are synonymous to uncertain decisions.
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Actually, decisions that involve risk are a special case of uncertain decisions, where the probabilities are precisely known. Finally, risk management is defined in the Glossary as “any action or portfolio of actions that aim to reduce the probability and magnitude of unwanted consequences (or vice versa), or manage the consequences of realized risks”. As pointed out in the framework, some decisions are taken under circumstances where the probabilities that particular outcomes or consequences will occur in the future can be precisely known. This is the case of a fair game of chance. This class of decisions are “decisions taken under precise uncertainty”, sometimes referred to as “decisions taken under risk”. For many decisions, however, probabilities cannot be known or estimated. These are a special class of “decisions taken under uncertainty”. The term “risk” is commonly used to describe situations in which both types of uncertainty apply. The framework, in its Part 2, includes a section under the title “Risk and uncertainty” where the concepts of risk, uncertainty and confidence are introduced and several issues are discussed, including risk analysis and risk management, risk-based decision-making, frameworks for environmental risk assessment, risk and the assessment of climate change impacts, types of uncertainty and recognizing uncertainty. The above section is followed by two more on risk and uncertainty connected with climate change. The first, under the title “Decision-making with climate change uncertainty” distinguishes outcome uncertainty from decision uncertainty, and discusses issues like climate sensitive decisions and mal-adaptation, hierarchical decision-making, decision-making criteria, decision analysis under uncertainty and risk, and climate change adaptation strategies and options. The second, under the title “Key aspects of climate change risk assessment”, explains the purpose and key components of a climate change risk assessment and how to identify exposure units, receptors and assessment endpoints as well as a set of climate variables for the climate change risk assessment. It also distinguishes between climate and non-climate scenarios and presents tools for climate change risk assessment and decision-making and for modeling climate influence. Finally, Appendix 3 provides a summary of tools and techniques mentioned at different points in the framework, which can be used at each stage of the analysis. The list of tools and techniques summarized is much broader than those recommended by the UNEP framework, which are almost all (except from switch-point analysis) summarized in Appendix 3. In addition to the above, the work and experience of UKCIP over the lifespan of the Programme is drawn upon in a more recent report (West & Gawith, 2005), which has four aims: •
To present a synthesis of the impacts of climate change in the UK based on findings from UKCIP studies;
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• • •
To identify emerging adaptation options; To describe UKCIP’s approach to stakeholder-led research and consider lessons learnt; and To identify gaps and priorities for future work.
Also, a UKCIP web-based resource (UKCIP, 2009) provides more detailed descriptions of the tools and techniques, allowing new tools to be identified, and updated information on the relevance and utility of these tools to climate change risk assessments to be provided to stakeholders and other users.
The Australian Greenhouse Office Framework Under the title “Climate Change Impacts & Risk Management - A Guide for Business and Government” the Australian Greenhouse Office has issued a guide whose purpose is to assist Australian businesses and organizations to adapt to climate change by integrating climate change impacts into risk management and other strategic planning activities in Australian public and private sector organizations. The recommended framework for risk management is described in 5 steps and appears in Figure 1 (Australian Greenhouse Office, 2006, Figure 5, p. 19). While a detailed presentation of these steps appears in chapter 9 of this book, it should be noted that the approach adopted by this framework is based essentially on building climate scenarios and identifying, analyzing and evaluating risks. A climate scenario, according to the Glossary used in the framework, is a coherent, plausible but often simplified description of a possible future state of the climate. A climate scenario should be viewed not as a prediction of the future climate but Figure 1. Steps in the risk management process. (Source: Australian Greenhouse Office, 2006)
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as a means of understanding the potential impacts of climate change and identifying the potential risks and opportunities to an organization created by an uncertain future climate. A climate change scenario can be defined as the difference between a climate scenario and the current climate. Regarding the concept of risk, the Glossary defines it as the chance of something happening that will have an impact on objectives. A risk is often specified in terms of an event or circumstance and the consequences that may flow from it and may have a positive or negative impact. It is measured in terms of a combination of the consequences of an event and their likelihoods. Risk identification, analysis and evaluation are defined as the processes of determining what, where, when, why and how something could happen, comparing the level of risk against risk criteria, and understanding the nature of and deducing the level of risk, respectively. Finally, risk management is defined as the culture, processes and structures that are directed towards realising potential opportunities whilst managing adverse effects. Risk management involves risk treatment, defined as the process of selection and implementation of measures to modify risk.
The Ministry for the Environment of New Zealand Framework Several tools aiming to help local governments to cope with the effects of climate change have been produced by the Ministry for the Environment of New Zealand, of which the most relevant to the topic of this section is the one under the title “Climate Change Effects and Impacts Assessment: A Guidance Manual for Local Government in New Zealand - 2nd Edition” (Ministry for the Environment, 2008). The tool may help both, local governments and private companies, to include uncertainty and risk management considerations in their analysis. According to the Glossary provided in the framework, risk is defined as “the chance of an event (an incident that occurs in a particular place during a particular interval of time, like floods, very high winds or droughts) being induced or significantly exacerbated by climate change, that event having an impact on something of value to the present and/or future community”. Risk is measured in terms of consequence or impact (the outcome of an event, expressed qualitatively in terms of the level of impact and measured in terms of economic, social, environmental or other impacts) and likelihood (the probability or chance of something happening measured qualitatively or quantitatively). Regarding uncertainty, for which no explicit definition is given, the framework devotes a chapter (chapter 7) outlining the uncertainty associated with climate change and key considerations in taking account of climate change in decision-making. The framework notes that developing projections of future climate changes is still subject to significant uncertainty. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Finally, risk assessment, defined as a systematic process for identifying risks associated with climate change, comparing them against other risks, prioritising them and developing adaptation plans or making specific decisions, is the subject of chapter 6, where the process of risk assessment is summarized (see chapter 9, Table 2). This process is based on the New Zealand Standard for Risk Management AS/NZS4360 suggesting a scenario-based approach, which involves developing a list of climate change event scenarios applicable to the issue and areas potentially affected, and assessing the risk presented by each scenario.
UNCERTAINTY, RISK AND INSURANCE While the above frameworks give specific guidance to uncertainty and risk handling in decision analysis under climate change, some special issues related to these topics have been addressed in several research works, many of which are (not unexpectedly) related to the insurance industry, the world’s largest sector. This sector is being increasingly affected by the impacts of climate change, including property damage from extreme weather events, operations disruption, human lives loss and injuries due to accidents, material loss etc. In a statement made by a major financial firm (Ernst and Young, 2008) climate change is set on top of a list of 10 strategic threats that the insurance industry is faced with in 2008, thus recognized as the most serious of such strategic threats. It is also noted that “this threat is typically viewed as a long-term issue with broad-reaching implications that will significantly affect the industry”. More specifically, the effect of these impacts takes place in the domain of insured liability, broad categories of which include commercial, product, environmental, professional, political, and personal and commercial vehicle liability claims (Ross et al., 2007). Commercial general liability claims include negligence, personal injury, and third-party business interruption via disruptions in supply chains, transportation, utility services, and communications. Product liability claims are associated with materials or products that contribute to climate change. Environmental liability claims may be laid to emitters of GHGs based on various impacts of climate change itself, or secondary consequences associated with toxic releases, mold, and other consequences of the physical impacts of climate change. Professional liability claims include, among others, corporate directors and officers’ liability for those involved as emitters or arising from failure to safeguard shareholder value from the impacts of climate change. Political risk liability claims may be triggered by new government policies (e.g., carbon levies). Finally, personal and commercial vehicle liability claims may derive from increased roadway accidents related to adverse weather.
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(Ross et al., 2007) explore the issue of insurance risk management strategies in the context of global climate in an article, whose primary goal is to identify practical risk-management strategies that will allow insurers and other businesses to preemptively mitigate their exposure to climate-change liability. They point out that efforts to recover costs of GHGs produced by emitters, who externalize the true costs of their contribution to climate change, can take the form of insurance claims as well as legal remedies. While an increasing awareness exists of the dimension of liability, they note that liability insurance risks (risks to insurers from claims of third-parties, who allege injury or property damage that may be the fault of the insured) are rising as scientific uncertainty surrounding climate change declines. They explore three major dimensions of the issue: sources of climate-change-related legal liability to third parties and their nexus with insurance and law, new liabilities associated with potential technological responses to climate- change, and potential roles for insurers, re-insurers, and other industry actors in proactively managing climate change-related liability insurance risks for themselves and their customers. They conclude that the response of insurers to the broader climate-change challenge will be key to the ultimate success of society’s overall response. In another paper (Whitmore, 2008) concerned with the risk aspects of natural disasters, it is noted that, while global climate change may be accelerating the trend of increasing frequency and costs of such disasters, many issues remain unresolved about the nature of disasters and their impact on human beings, other life forms and the natural environment. The paper looks at how principles of risk management and engineering reliability might be used to assess and manage disaster risks and how these principles offer guidance for the prevention of disasters and the mitigation of their effects. It refers to the basic methods of risk management established as standard subject in the field of insurance and categorized as: • • • • •
avoidance (avoiding the risk by eliminating an antecedent condition for its occurrence), reduction (reducing the probability of occurrence or magnitudes of the consequences), retention (retaining the risk), combination (mutual insurance pool, i.e. pooling risks and sharing losses) and transfer (transferring risk to another party by means of an insurance contract between insured and insurer).
Notice that two of these methods, combination and transfer, are explicitly related to insurance. Also, the paper cites several avoidance and reduction strategies for disaster risk management roughly categorized as:
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• •
•
• •
controlling antecedent events (suppressing or eliminating the origins of a disaster by focusing on understanding and interrupting the causal chain for it), containment (taking actions that either limit the number of members experiencing a serious level of consequences or limit the magnitudes of individual consequences), robust design (social systems design so that they are robust or resilient to foreseen or unforeseen modes of disaster, thus ensuring that societal systems are strong enough to withstand a major assault), diversification (spreading risk) and population control (limiting the size of the members of a society that might be exposed to a disaster by, e.g., family planning).
(Kousky & Cook, 2009) point out that climate change is creating new risks, altering the risks we already face, and also, importantly, impacting the interdependencies between these risks. Therefore, adapting to climate change will not only require responding to the physical effects of global warming, but will also require adapting the way we conceptualize, measure, and manage risks. They focus on three particular phenomena of climate (and insurance) related risks: global micro-correlations (that is, very small, even undetectable, correlations between variables, such as insurance policies), fat tails (meaning, particularly in the case of damage distribution, distributions in which the probabilities of ever more serious damage decrease slowly relative to the extent of the damage), and tail dependence (meaning the possibility that bad events happen together). Some preliminary policy implications from their work include four issues that stand out for the insurance of natural disaster risk: •
•
Limits to Securitization: Securitization (in this case, securitization of insurance risk), is a risk management tool by means of which insurers issue securities linked to bundles of insurance risk, thus transferring underwriting risks to the capital markets through the creation and issuance of financial securities. The authors point out that, in the presence of micro-correlations, a point is reached beyond which further securitization is unhelpful and can actually hurt. Strategies for identifying potential micro-correlations are needed, as are approaches for identifying and implementing limits to aggregation. Conditional Indemnity: If indeed correlation is found to concentrate at high damage levels, it may well be that conditionalizing on small to modest damage levels could define markets in which diversification is viable, meaning that, in theory, a cap could be indentified, under which tail dependence is at a minimum and private markets could function.
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•
•
A Role for Mitigation: Damage distributions, like the insurance claims examined in the paper, are a function of both a natural hazard and human exposure to that hazard. Addressing exposure, through location decisions, or through mitigation policies, can reduce damages from extreme events. Affordability and Equity: Insurance companies have three response options to avoid underestimating risk. They can reduce exposure, increase the amount of capital they are holding in reserve, or purchase protection from re-insurers or the financial markets. Any of these options will drive up insurance prices. But if prices rise higher than those who are insured are willing to pay, then the private re-insurance market may break down, and a broader socio-political discussion of how to manage catastrophe risk will ensue. The authors discuss an example of how a collapse in private insurance markets can be poorly handled if the trade-offs are not fully considered. They conclude that, when catastrophic losses are possible, private insurance may be unable to effectively operate and the question of how society should then manage this risk and how the costs of a disaster should be distributed needs to be carefully discussed.
In (Hecht, 2008), dealing with transformation of risk under climate change, it is noted that risks will be significantly increased in many areas of society as a result of climate change, which will render far less measurable risks that were previously calculable. The insurance industry, being society’s primary financial risk manager, needs to play a leading role in developing robust institutions and practices to manage these risks, ensuring that society will survive climate change without significant human costs. However, climate change poses an unprecedented challenge to the insurance industry, because, among other factors, increasing uncertainty and the potential for highly correlated losses will make it difficult to insure against climate change-related risks and will strain capital markets’ ability to compensate those who are affected. The author claims that, if the insurance industry rises to the challenge, it will stand to profit, otherwise insurers will suffer along with everyone else. The article examines the incentives that insurance products provide to influence the climate change-mitigating and adaptive capacity-building behavior of policyholders and other actors (e.g. by means of conditioning the availability of insurance on climate-friendly behavior or by creating pricing structures that give financial advantages to policyholders who engage in such behavior). It also looks at the reasons that insurers might or might not choose to provide those products and the reasons individuals and businesses may or may not choose to purchase those products. Finally, the author puts the question “can insurers play a quasi-regulatory role?”. He opines that the industry seems a likely candidate to have a significant influence on other actors’ behavior. He concludes that, although it is not yet clear whether and how the insurance industry will be able to address climate change in Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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a way that systematically creates solutions, the industry’s future may rest on the success or failure of its adaptation to a world with a changing climate. In (Mills & Lecomte, 2006, Figure 4, p. 15), a list of “creative services and products” of the insurance industry that are already available and advance climate insurance solutions is given, along with selected examples (the full list is found in Appendix A of the report). They appear under the following headings naming types of activity (examples of specific activities are given in parenthesis): • • • •
• •
•
Promoting Loss Prevention (Integrating Energy Management & Risk Management, Better Management of Forestry, Agriculture, and Wetlands etc) Crafting Innovative Insurance Products and Services (New Insurance Products for Energy Service Providers, Energy-Savings Insurance etc) Participating in Carbon Markets (Facilitating Carbon Trading, Managing risk for Clean-Development Mechanism projects etc) Aligning Terms and Conditions with Risk-Reducing Behavior and Capitalizing on the “Halo Effect” (Assigning Directors & Officers Liability, The “Halo Effect”) R&D and Investment in Climate Change Solutions (Research and Development, Investments, Climate-Responsive Funds) Building Awareness and Participating in the Formulation of Public Policy (Consumer Information and Education, Having a Voice in Public Policy Discussions on Climate Change etc) Leading by Example (In-House Energy Management, Reducing Insurers’ Carbon-footprint Through Improved Operations, Disclosing Climate Vulnerabilities and Liabilities).
The report discusses each of these types of activities. It gives also examples of activities, explaining the service or product produced, together with the insurance industry developer of the respective activity referenced in the above list. Furthermore, a ten-point strategy is suggested, to be implemented by any insurer that has integrated best practices into his/her business. For example, “make concerted efforts to restore and maintain the insurability of extreme weather events. This may require partnerships with governments, e.g., in the cases of improved land-use planning and enforced building codes” is one such point. Another is “utilize terms and conditions to foster the right decisions by customers. This could range from rewarding riskminimizing behavior to excluding climate change liabilities for those who make imprudent decisions either as emitters of GHGs or managers of risks associated with climate change”.
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The above list of activities is considerably enhanced in more recent reports published by Ceres (www.ceres.org), a U.S. coalition of investors, environmental groups, and other public interest organizations working with companies to address sustainability challenges such as climate change (Ceres also directs the Investor Network on Climate Risk, a group of 50 institutional investors from the U.S., Europe, and Canada who collectively manage over $3 trillion of assets). Thus, in (Mills, 2009), the activities are grouped into 10 broad categories, which are further broken down into 35 specific classes of activity. It is noted that insurers are “drilling deeper”, filling coverage gaps, testing new delivery strategies, and developing new partnerships with parties outside of the insurance sector. The report signalizes a significant growth of relevant activities, identifying a wide spectrum of insurance opportunities, with 643 real-world examples from 243 insurers, re-insurers, brokers, and insurance organizations from 29 countries, while new activities are emerging almost daily. This growth of activities is accompanied with a continued proliferation of collaborations between insurers and non-insurance groups.
DISCUSSION AND CONCLUSION In this chapter, the issues of uncertainty and risk, which are critical in policy making in a climate change context, have been addressed. Definitions of these terms have been presented and several approaches to management under uncertainty and risk within this context have been presented. Two main reference frameworks have been found of particular importance for this task, as both are generally considered having shaped today’s common understanding of the problem of climate change, its impacts on society and economy, and policy formulation aiming to adapt to and/ or mitigate the causes of the problem. The first has been the Fourth Assessment Report of IPCC, the main source of this book about facts concerning global warming. The “Uncertainty Guidance Note provided for the Fourth Assessment Report”, intended to assist lead authors of the Report on addressing uncertainties, has been particularly valuable for the definition of terms related to uncertainty. The second reference framework has been the Stern Review, where climate impacts on society and economy are analysed and global warming related policies, particularly for the handling of risk and uncertainty inherent in the relevant problems, are suggested. From the introductory discussion regarding uncertainty and risk some important conclusions should be given attention: first, value uncertainties and structural uncertainties are two distinct primary types in the relevant classification, while a different type arises in chaotic or not fully deterministic systems, which limits the ability to project all aspects of climate change. Second, a distinction between levels of confidence in scientific understanding and the likelihood of specific results should Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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be made. And, third, large risks and uncertainties characterize costs and benefits of climate policy, making it necessary to handle these issues explicitly. The presentation of uncertainty and risk handling in the two main reference frameworks (the Fourth Assessment Report of IPCC and the Stern Review) has also yielded some interesting results. In the first case, use is made of appropriate qualitatively calibrated levels of precision to describe findings. Thus qualitative values are used for assessing the existing level of understanding on key issues, the likelihood of occurrence of an event and the confidence regarding the correctness of a model, an analysis or a statement. These qualitative values correspond, however, to specified quantitative value intervals in the cases of levels of confidence and likelihood scale. Uncertainty estimates in the case of the Stern Review, as opposed to the Fourth Assessment Report of IPCC, are mostly measured explicitly in quantitative terms. Thus several studies provide a probabilistic framework to climate projections, whose outcome is a series of probability distribution functions that aim to capture some of the uncertainty in estimates made. The same is true for the possible outcome (and the related risks) of actions taken in order to adapt to or mitigate climate change. An important climate change feature, among others, is that uncertainties and risks in the economic impacts are pervasive and that there is a serious risk of major, irreversible change with non-marginal economic effects. Worthy noting is the statement made that uncertainty is an argument for more, not less, demanding climate change adaptation/mitigation goals, because of the size of the adverse climate change impacts in the worse case scenarios. An interesting variety of approaches to uncertainty and risk characterize different decision frameworks developed to assist in decision analysis under climate change. The UNEP framework recommends a set of methodological tools, including sensitivity analysis, use of scenarios, etc, to evaluate alternative actions in the presence of uncertainty and risk. The UK Climate Impacts Programme framework provides formal definitions of uncertainty, risk and risk management, together with an extensive treatment of issues related to risk analysis and risk-based decision-making under climate change. A long list of tools and techniques are also summarized, supplemented with a web-based resource that provides more detailed descriptions of these tools and techniques. The Australian Greenhouse Office Framework recommends a risk management process in 5 steps, based essentially on building climate scenarios and identifying, analysing and evaluating risks. Finally, the Ministry for the Environment of New Zealand Framework offers several tools aiming to help local governments to cope with the effects of climate change, which, however, may also help private companies to include uncertainty and risk management considerations in their analysis.
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Inherent in all the above frameworks is the requirement that adaptation/mitigation systems employed in order to cope with problems emerging from climate change be designed based on principles of engineering safety, particularly principles aiming to secure risk and uncertainty reduction. In (Möller & Hansson, 2008) 24 principles of safety engineering referred to in the literature are listed, divided into four major categories: inherently safe design, safety reserves, safe fail and procedural safeguards. The first category of principles, inherently safe design, requires that the inherent dangers in the process be minimized as far as possible, meaning that potential hazards are excluded rather than just enclosed or otherwise coped with. The safety reserves category includes principles requiring that constructions be strong enough to resist loads and disturbances exceeding those that are intended. Safe fail is a set of principles according to which the system should fail “safely”, meaning either that internal components may fail without the system as a whole failing, or that the system fails without causing harm. Finally, procedural safeguards includes principles concerning procedures and control mechanisms for enhancing safety, ranging from general safety standards and quality assurance to training and behavior control of the staff. In addition to engineering safety, implementation of advanced technology in a system’s design is a factor that enhances the possibility of the system’s successful performance. Combined application in risk management of principles of engineering safety and technologically advanced options may optimize the result. Concerning the latter, (Aasgeir, 2009) notes that current regulatory systems focus on the state of scientific evidence as the predominant factor for how to handle risks to human health and the environment. However, production and assessment of risk information are costly and time-consuming. Thus, he proposes the inherency risk analysis method that aims at providing a solution-focused, systematic technology-based approach for addressing and setting priorities for environmental problems. The method combines risk assessment with the search for alternative technological options as a part of the risk management procedure. The first stage of the method focuses on the original agent subject to investigation, the second on identifying technological options and the third reviews the different alternatives, searching for the most attractive tradeoffs between costs and inherent safety. The result of this procedure is then used for deciding which technology option to pursue. Thus, by combining risk assessment with a structured approach to identify superior technology options within a risk management system, the result could be a win–win situation for both company and the environment. Finally, this chapter discusses the impacts of global warming and, more specifically, of the uncertainty and risk characterizing business decisions under climate change, on the world’s largest sector, the insurance industry. As said earlier, climate
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change is recognized as the most serious of strategic threats that the industry is currently faced with, incurring excessive and increasing liabilities (commercial, product, environmental, professional, political, and personal and commercial vehicle liability claims). In order to cope with this reality, practical risk-management strategies are explored that may allow insurers and other companies to preemptively mitigate their exposure to climate-change liabilities and risks. Such strategies may include application of principles of risk management and engineering reliability, avoidance and reduction strategies for disaster risk management, setting conditional limits to securitization etc. In addition, several services and products of the insurance sector are already available that advance climate insurance solutions. Although the focus of the discussion regarding the insurance industry is on the accelerating trend of liabilities, costs and losses, it is important to note that there are claims, according to which, if the insurance industry rises to the challenge, it will stand to profit. (Mills, 2007) points out that, while many insurers continue to focus chiefly on financial risk management in response to climate change, others are realizing that a more proactive, holistic approach to the issue presents significant opportunities to grow revenues, reduce risk and improve brand value. In particular, according to the author, hundreds of billions of dollars will be spent on clean energy technologies and other responses, which represent an enormous new capital base with associated business operations requiring insurance.
REFERENCES Aasgeir, A. (2009). Dealing with uncertainty and pursuing superior technology options in risk management - The inherency risk analysis. Journal of Hazardous Materials, 164, 995–1003. doi:10.1016/j.jhazmat.2008.09.007 Adger, W. N., Brooks, N., Bentham, G., Agnew, M., & Eriksen, S. (2004). New Indicators of Vulnerability and Adaptive Capacity. Final Project Report. Tyndall Centre for Climate Change Research. Retrieved February 18, 2009, from http:// ncsp.undp.org/docs/658.pdf Australian Greenhouse Office. (2006). Climate Change Impacts & Risk Management - A Guide for Business and Government. Prepared for the Australian Greenhouse Office, Department of Environment and Heritage by Broadleaf Capital International Marsden Jacob Associates. Retrieved December 16, 2009, from http://www.sfrpc. org/data/ClimateChange/3.pdf
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Bui, B., Hunt, C., & Fowler, C. (2008). A Risk-Focused Performance Management System Framework for Planning Change in Organisations Subject to Significant Environmental Pressures and Uncertainty. Working Paper Series, Working Paper No. 61. Retrieved February 18, 2009, from http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1370082 Climate Risk Disclosure Initiative. (2006a). Global Framework for Climate Risk Disclosure. 2006. Retrieved February 18, 2009 from http://www.unepfi.org/fileadmin/documents/global_framework.pdf Climate Risk Disclosure Initiative. (2006b). Using the Global Framework for Climate Risk Disclosure. Guide to disclosing climate risk to investors. Examples of disclosure from leading corporations. Retrieved from http://www.unepfi.org/ fileadmin/documents/using_framework.pdf Ernst & Young. (2008). Strategic Business Risk 2008: Insurance. Retrieved February 18, 2009, from http://www.ey.com/Global/assets.nsf/International/Industry_Insurance_StrategicBusinessRisk_2008/$/file/Industry_Insurance_StrategicBusinessRisk_2008.pdf Hecht, S. B. (2008). Climate Change and the Transformation of Risk: Insurance Matters. UCLA School of Law Research Paper No. 08-24. UCLA Law Review, 55(6). Retrieved February 18, 2009, from http://ssrn.com/abstract=1159853 Hellmuth, M. E., Moorhead, A., Thomson, M. C., & Williams, J. (Eds.). (2007). Climate Risk Management in Africa: Learning from Practice. New York: International Research Institute for Climate and Society (IRI), Columbia University. Hobbs, B. J., Chao, P. T., & Venkatesh, B. N. (1997). Using decision analysis to include climate change in water resources decision making. Climatic Change, 37, 177–202. doi:10.1023/A:1005376622183 Hurd, B., Raucher, R. S., Pitts, G., Ottem, T., Bishop, R., Hanemann, M., & Burmaster, D. (1997). Analysis of Uncertain Regulatory Benefits and Costs: Assessing the Conceptual and Empirical Issues. White Paper. Prepared for the U.S. Environmental Protection Agency, Office of Economy and Environment, Washington, DC. IIGCC. (2006). Managing Investments in a Changing Climate. Institutional Investors Group on Climate Change. Retrieved January 17, 2009, from http://www.iigcc. org/docs/PDF/ManagingInvestmentsChangingClimateIIGCCconferencereport.pdf IPCC. (2005). Guidance Notes for Lead Authors of the IPCC Fourth Assessment Report on Addressing Uncertainties. Retrieved January 17, 2009, from http://ipccwg1.ucar.edu/wg1/Report/AR4_UncertaintyGuidanceNote.pdf Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm IPCC. (2007a). Climate change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Report of the Intergovernmental Panel on Climate Change. (S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor & H. L. Miller, Eds.). New York: Cambridge University Press. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg1_report_the_physical_science_basis.htm Jones, R. N. (2001). An Environmental Risk Assessment/Management Framework for Climate Change Impact Assessments. Natural Hazards, 23(2-3), 197–230. doi:10.1023/A:1011148019213 Keynes, J. M. (1921). A Treatise on Probability. London: Macmillan. Knight, F. (1921). Risk, Uncertainty and Profit. New York: Kelly. Kousky, C., & Cook, R. M. (2009). Climate Change and Risk Management: Challenges for Insurance, Adaptation, and Loss Estimation. RFF Discussion Paper No. 09-03-REV. Retrieved May 31, 2009, from http://ssrn.com/abstract=1346387 Manning, M. R., Petit, M., Easterling, D., Murphy, J., Patwardhan, A., Rogner, H.-H., et al. (Eds.). (2004). IPCC Workshop on Describing Scientific Uncertainties in Climate Change to Support Analysis of Risk and of Options: Workshop report. Geneva: Intergovernmental Panel on Climate Change. Meinshausen, M. (2006). What does a 2°C target mean for greenhouse gas concentrations? - A brief analysis based on multi-gas emission pathways and several climate sensitivity uncertainty estimates. In Schellnhuber, H. J., Cramer, W., Nakicenovic, N., Wigley, T., & Yohe, G. (Eds.), Avoiding dangerous climate change (pp. 265–280). Cambridge, UK: Cambridge University Press. Mills, E. (2007). Responding to climate change - The Insurance Industry Perspective. Climate Action. Retrieved May 31, 2009, from http://www.climateactionprogramme. org/features/article/responding_to_climate_change_the_insurance_industry_perspective/
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Mills, E. (2009). From Risk to Opportunity: 2008 - Insurer Responses to Climate Change. A Ceres Report. Retrieved May 31, 2009, from http://www.ceres.org/ Document.Doc?id=417 Mills, E., & Lecomte, E. (2006). From Risk to Opportunity: How Insurers Can Proactively and Profitably Manage Climate Change. A Ceres Report. Retrieved May 31, 2009, from eetd.lbl.gov/emills/pubs/pdf/ceres_report_090106.pdf Ministry for the Environment. (2008). Climate Change Effects and Impacts Assessment: A Guidance Manual for Local Government in New Zealand (2nd Ed.). (B. Mullan, D. Wratt, S. Dean, M. Hollis, S. Allan, T. Williams, G. Kenny, Eds.). Wellington: Ministry for the Environment. Retrieved May 31, 2009, from http:// www.mfe.govt.nz Möller, N., & Hansson, S. O. (2008). Principles of engineering safety: Risk and uncertainty reduction. Reliability Engineering & System Safety, 93, 776–783. doi:10.1016/j.ress.2007.03.031 Moss, R., & Schneider, S. (2000). Uncertainties. In Pachauri, R., Taniguchi, T., & Tanaka, K. (Eds.), Guidance Papers on the Cross Cutting Issues of the Third Assessment Report of the IPCC. Geneva: Intergovernmental Panel on Climate Change. Ross, C., Mills, E., & Hecht, S. B. (2007). Limiting Liability in the Greenhouse: Insurance Risk-Management Strategies in the Context of Global Climate. UCLA School of Law, Public Law & Legal Theory Research Paper Series. Research Paper No. 07-18. Retrieved February 23, 2009, from http://ssrn.com/abstract=987942 Stainforth, D. A., Aina, T., Christensen, C., Collins, M., Faull, N., & Frame, D. J. (2005). Uncertainty in Predictions of the Climate Response to Rising Levels of Greenhouse Gases. Nature, 433(7024), 403–406. doi:10.1038/nature03301 Stern Review. (2006). Stern Review on the Economics of Climate Change. HM Treasury, Cabinet Office. Retrieved December 3, 2008, from http://www.hm-treasury. gov.uk/stern_review_report.htm Suarez, P., Givah, P., Storey, K., & Lotsch, A. (2008). HIV/AIDS, Climate Change and Disaster Management: Challenges for Institutions in Malawi. World Bank Policy Research Working Paper 4634. Retrieved February 23, 2009, from http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=1149567# UKCIP. (2009). Tools to help you. UK Climate Impacts Programme. Retrieved November 18, 2008, from (http://www.ukcip.org.uk/index.php?option=com_cont ent&task=view&id=74&Itemid=187)
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UNEP. (1998). Handbook on Methods for Climate Change Impact Assessment and Adaptation Strategies, Version 2.0. (J. F. Feenstra, I. Burton, J. B. Smith & R. S. J. Tol, Eds.). Vrije Universiteit Amsterdam and United Nations Environment Programme Institute for Environmental Studies. Retrieved November 18, 2008 from http://dare.ubvu.vu.nl/bitstream/1871/10440/1/f1.pdf West, C. C., & Gawith, M. J. (Eds.). (2005). Measuring progress: Preparing for climate change through the U.K. Climate Impacts Programme. Oxford, UK: UKCIP. Retrieved November 18, 2008, from http://www.ukcip.org.uk/images/stories/ Pub_pdfs/MeasuringProgress.pdf Whitmore, G. A. (2008). Using Principles of Risk Management and Engineering Reliability to Reduce Disaster Risks. Retrieved February 22, 2009, from http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=1032157 Willows, R. I., & Connell, R. K. (Eds.). (2003). Climate adaptation: Risk, uncertainty and decision-making. UKCIP Technical Report. UKCIP, Oxford. Retrieved November 18, 2009, from http://www.ukcip.org.uk/images/stories/Pub_pdfs/Risk.pdf World Bank Group. (2006). Managing Climate Risk - Integrating Adaptation into World Bank Group Operations. World Bank Group, Global Environment Facility Program. Retrieved February 22, 2009, from http://siteresources.worldbank.org/ GLOBALENVIRONMENTFACILITYGEFOPERATIONS/Resources/Publications-Presentations/GEFAdaptationAug06.pdf
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Chapter 9
Frameworks of Policy Making Under Climate Change
INTRODUCTION How can decision-makers ensure that their policies will be robust enough to cope with the challenges of a climate, which is changing dramatically? How best to adapt to climate variability and extreme events? Which are the best practices for understanding, analysing and finally managing the risks that are associated with climate change and face business entities, communities, individual countries and the whole planet? Are there appropriate frameworks and methods available, capable to assist in systematically carrying out the decision-making and policy process? Questions such as these have not only a theoretical scope, but a great practical significance as well. Decision makers have been seeking for appropriate guidance and analytical frameworks to deal with these questions. DOI: 10.4018/978-1-61692-800-1.ch009 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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It is only natural that, as a response to this need, several decision analysis frameworks were developed and proposed, which may be used as support tools in order to formulate policies aimed to cope with the impacts of climate change, and more specifically to help design relevant adaptation and/or mitigation measures. Some of these frameworks are general approaches, which may be used in both the private and public sector, while others may be used in specific areas, e.g. local governments. In particular, several tools that appeared most likely to be useful to government officials engaged in adaptation planning are listed in a report published by the H. John Heinz III Center for Science, Economics and the Environment under the title “A Survey of Climate Change Adaptation Planning” (Heinz, 2007). The survey concentrated on U.S. and Western-centric reports, written in English, with an emphasis on practicality. The following eight guidebooks and frameworks were selected and are surveyed in the report, presented in chronological order of their publication date (with the most recent first): 1.
2. 3. 4. 5. 6.
7. 8.
“Preparing for Climate Change: A Guidebook for Local, Regional and State Governments”, Climate Impacts Group (University of Washington), ICLEI, King County, Washington, funded by NOAA. (Initiated by a 2005 conference), September 2007. “Cities Preparing for Climate Change: A Study of 6 Urban Regions”, Clean Air Partnership (Toronto, Canada), May 2007. “Adapting to Climate Change: An Introduction for Canadian Municipalities”, Canadian Climate Impacts and Adaptation Research Network, February 2006. “Surviving Climate Change on Small Islands: A Guidebook”, Tyndall Centre for Climate Change Research (Norwich, UK), October 2005. “Climate Change Risk and Vulnerability: Promoting an Efficient Adaptation Response in Australia”, Australian Greenhouse Office, March 2005. “Coastal Hazards and Climate Change: A Guidance Manual for Local Government in New Zealand”, New Zealand Climate Change Office, May 2004. “Climate Adaptation: Risk, Uncertainty and Decision-making”, UK Climate Impacts Programme Technical Report (Oxford, UK), May 2003. “Handbook on Methods for Climate Change Impact Assessment and Adaptation Strategies”, United Nations Environment Programme, Institute for Environmental Studies, Vrije Universiteit, Amsterdam, October 1998.
The report includes a broad overview chart, which displays the results of applying criteria such as “applicability to different levels of government and types of environmental challenges”, “sufficiency of detail for policy construction”, “provision for a decision-making framework” etc. to the eight frameworks selected. Notably Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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the chart reveals that “there is no “perfect” guidebook or framework among those examined. However, each has its own unique focus areas, reflecting the differing objectives, experiences and perspectives of those who produced it”. In this section, an overview of four decision analysis frameworks will be presented. The frameworks selected are the guidance manual for Local Government in New Zealand, the Guide for Business and Government published by the Australian Greenhouse Office, the UK Climate Impacts Programme and the United Nations Environment Programme. They were selected with the major criterion being to serve the main purposes of this book, and more specifically, to be of the widest applicability, with proper adjustment, if necessary. That means that they are not restricted as decision aid tools for government officials only, but may be implemented by decision analysts in the private sector as well.
THE UNEP FRAMEWORK Scope and Structure This framework (referred to as the UNEP framework in the sequel) is described in the “Handbook on Methods for Climate Change Impact Assessment and Adaptation Strategies” (UNEP, 1998), an initiative developed by the United Nations Environment Programme (UNEP) as part of UNEP’s participation in the development of guidelines and handbooks for Climate Change Country Studies. The project was also part of the World Climate Impact Assessment and Response Strategies Programme (WCIRP) and as such contributes to the International Climate Agenda. The project was co-ordinated by the Institute for Environmental Studies, Vrije Universiteit, Amsterdam. The handbook may help conducting a variety of impact and adaptation studies for a variety of circumstances. It is addressed to a variety of clients, and focused on anything, from a very specific impact on one small part of the socio-economic or natural system to a broad, multi-sectoral, integrated study at a national or regional level. While realizing that it is practically impossible to specify a design that can serve all purposes, the handbook is organized in two parts, one treating generic and cross-cutting issues, and the other presenting methods for studying impact and adaptation in selected sectors, including water resources, coastal resources, agriculture, rangelands, health, energy, forests, biodiversity and fisheries. In particular, Part I of the UNEP handbook includes a “getting started” chapter, which deals with issues, methods, and considerations common to all impact and adaptation studies. The subjects of how to design and where to obtain scenarios are discussed, and scenarios of climate change as well as scenarios of the socio-economic Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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context in which climate change impacts and adaptation may occur are treated. The need for integration across sector studies and interaction with stakeholders is discussed and ways of establishing such integration and interaction are suggested. Finally, the issues of adaptation to climate change, the sort of options that exist and how to evaluate them are treated. Part II of the UNEP handbook deals with methods in the specific sectors mentioned above. In order to maintain some comparability among the respective chapters, a common format insofar as their subject matter permits is followed. Each of the chapters begins with a brief introduction that defines and describes the scope of the problem. The likely or known climate change impacts in the sectors are briefly described. Against this background an array of the various methods is presented, including some of the less demanding methods, in terms of data, modelling requirements, and the like, alongside the more complex and demanding methods. As a result, the range of different levels of complexity in the methods is illustrated. The aim of the book is to be user friendly, and to provide enough information to permit users to make a more informed choice in the design of impact studies, as well as to begin identification and preliminary assessment of adaptation.
Generic Issues According to the UNEP framework, at the beginning of an assessment of climate change impacts and adaptation strategies, a number of important questions should be addressed. Such questions should be widely discussed at the outset, and satisfactory answers should be agreed by the main parties, including those providing the funds, the researchers (those carrying out the research and those directing it), and the affected community (those who may be affected by climate change or response to it and thus have a stake in the analysis). The questions to be addressed are the following: • • • • • • • • •
How is the problem to be defined? What are the goals of the assessment? What time and what space (the spatial extent of the assessment and the length of time into the future that the decision will be considered)? What are the assessment boundaries (geographic boundaries, depth of assessment)? What sectors and areas are to be included in the assessment? How can comparability be ensured? How can the project be sufficiently integrated (avoid relative isolation)? How should adaptation be addressed? Should a pilot project be carried out?
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• •
•
What plans should be made for the communication and use of results? What types of method and tools should be used (quantitative, biophysical, economic, or integrated systems models, empirical studies, expert and stakeholder judgement and participation, remote sensing and GIS) How progress is kept on track and assessed?
The guide makes comments and recommendations for each question in order to help analysts and decision makers to give appropriate answers.
Socio-Economic Scenarios Next, the issue of socio-economic scenarios is treated, i.e. scenarios of how populations and economies will develop in the future and how this will affect the impacts of and adaptation to climate change. A scenario is a “plausible and often simplified description of how the future may develop, based on a coherent and internally consistent set of assumptions about driving forces and key relationships. Scenarios may be derived from projections, but are often based on additional information from other sources, sometimes combined with a narrative storyline” (http://www1.ipcc. ch/pdf/glossary/ar4-wg1.pdf). Socio-economic scenarios are scenarios of the state and size of the population and economy. They comprise everything that shapes a society, including the number of people in a country, as well as their age, health, gender, values, attitudes, religion, education, where and how they live, and so on. They also comprise economic parameters, such as the gross domestic product, as well as income distribution, relative importance of economic sectors, imports and exports, unemployment, savings, and land and water use. Finally, socio-economic scenarios also comprise technology, legislation, culture, processes of decisionmaking and environmental changes associated with socio-economic changes, such as land use change, land degradation, eutrophication, and nature preservation. Climate scenarios are scenarios of climatic conditions; therefore they cover part of socio-economic scenarios. The questions of how such scenarios can be developed and to what use they can be put are discussed, and a background to socio-economic scenarios in the context of climate change impact research is provided. Scenarios are often based on a combination of expert judgment, extrapolation of trends, international comparisons, and model runs. Historical developments are a good guide for future developments. However, simple extrapolation should be avoided. Understanding the phenomena underlying the observed trends and the forces that shape the past developments is necessary for adequate extrapolation.
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The framework gives a list of possible socio-economic scenarios needed for climate change impact and adaptation analysis, per sector or system, for the sectors mentioned above (water resources etc.). For example, in the case of energy, the Handbook lists the following variables needed for such a scenario: • • • •
Population Economic structure Power-generation structure Adaptation capacity (economic, technological, institutional).
Furthermore, the framework lists a number of existing socio-economic scenarios. In particular, for each scenario creator (e.g. World Bank, World Health Organization etc), and for each scenario parameter (e.g. population, income etc), the following data is given: period, to which each scenario parameter refers, number of scenarios, geographical coverage and the source of reference. Thus in the case of the World Health Organization, the parameter is mortality (age, gender, cause), the period is 1990-2020, one scenario has been created and the scenario has world coverage (8 regions). As the future is uncertain, a single scenario for future developments may transmit a false sense of certainty to the study’s audience, therefore, multiple scenarios, at least three, should always be used, which have the additional advantage that a better understanding of the system under consideration is obtained. As the Handbook puts it, multiple scenarios can show how different development paths may affect vulnerability differently and using them is in fact a sophisticated sensitivity analysis. Socio-economic scenarios are used to provide the context in which climate change will have its impact. Thus, the scenarios of socio-economic parameters have to be linked to the impact analysis. An impact analysis usually starts with an analysis of a sector or system (e.g., agriculture, health) in the current situation. Next, climate is perturbed and the impact on the sector or system (e.g., higher yields, more malaria) is analyzed. Socio-economic scenarios are used to perturb other-than-climatic influences on the sector or system. A number of examples by sector are given of how scenarios of socio-economic parameters have been linked to the impact analysis and how this has been handled in the impacts and adaptation literature. The UNEP framework concludes the discussion on the socio-economic scenarios by noting that, as a first step, the crucial elements that are likely to change should be identified. Such elements may be, for example, the size of the population, water use upstream, or agricultural policy. As a second step (probably the easiest one), a scenario of how these crucial elements might change over the next decades needs to be developed or, preferably, obtained. Instead of developing scenarios, these should be borrowed from the literature. If no scenarios are available, use of historical trends and geographical Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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analogues should be made in order to inspire scenario development. If time permits, more than one scenario should be used. As a third step, the impact and adaptation analysis must be combined with the socio-economic scenario. Of these steps, the first and third ones are specific to the situation of a country study. As noted in the framework, general guidelines are either too vague to be helpful or too specific to be applicable to each case. Using appropriate experts will probably help. Furthermore, the literature on climate change impacts and adaptation is rapidly expanding, and full of examples how others have tried to solve this problem.
Climate Change Scenarios The discussion continues with climate change scenarios. In particular, the conditions for selecting climate change scenarios are analysed and generic types of such scenarios are presented, including general circulation models, synthetic and analogue scenarios. General circulation models are mathematical representations of atmosphere, ocean, ice cap, and land surface processes based on physical laws and physicallybased empirical relationships. Synthetic scenarios, sometimes referred to as arbitrary scenarios, are based on incremental changes in such meteorological variables as temperature and precipitation. Finally, analogue scenarios involve the use of past warm climates as a scenario of future climate (temporal analogue scenario), or the use of current climate in another (usually warmer) location as a scenario of future climate in the study area (spatial analogue scenario). The issues of combinations of options as well as of selecting and designing climate change scenarios are treated in the framework and example approaches to scenario construction are presented. The UNEP framework notes that more than one scenario should be used to show that there is uncertainty about regional climate change. Using one scenario can be misinterpreted as a prediction. Using multiple scenarios, particularly if they reflect a wide range of conditions (e.g., wet and dry) indicates some of the uncertainty about regional climate change. Climate change scenarios have been typically developed for a particular point in the future. Many climate change scenarios examine the climate associated with a doubling of carbon dioxide levels in the atmosphere over pre-industrial levels (2xCO2). This, according to the framework, will most likely happen in the last half of the twenty-first century. These could be considered static scenarios because they are based on the (false) presumption that a stable climate will be reached in the future. This assumption is made to simplify analysis, not because it is widely believed that climate will reach a static condition. In contrast, transient scenarios examine how climate may change over time. They typically start in the present day and cover a number of decades into the future. Climate change scenarios are not predictions of the future in the way that weather forecasts are. Rather, they are plausible indications of what the climatic future could be like, given Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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a specific set of assumptions. The range of plausible climate change scenarios is much greater than that determined by uncertainties in climate models alone, and depends to a considerable extent on future global demographic and technological change, land utilization, and ecological adaptation. Thus, prediction is too ambitious a term for such a tentative and provisional exercise of looking into the future (Henderson-Sellers, 1996). Four conditions should be met by climate change scenarios selected for impact assessment. First, the scenarios should be consistent with the broad range of global warming projections based on increased atmospheric concentrations of greenhouse gases (GHGs), e.g., 1 to 3.5 °C by 2100 (Houghton et al., 1996), or 1.5 to 4.5 °C for a doubling of CO2 concentrations (IPCC, 1990). Second, the scenarios should be physically plausible, i.e. they should not violate the basic laws of physics. Third, the scenarios should estimate a sufficient number of variables on a spatial and temporal scale that allows for impacts assessment (Smith & Tirpak, 1989; Viner & Hulme, 1992). And fourth, the scenarios should, to a reasonable extent, reflect the potential range of future regional climate change. In assessing options for creating climate change scenarios, it is important to meet as many of these conditions as possible. Where conditions are not met, the shortcoming should be acknowledged in reporting the results of analyses that use the scenarios. The framework gives a list of sources of scenario information. It also discusses several issues in selecting and designing climate change scenarios (e.g. how to use general circulation models for scenario construction, which general circulation models to select, the issue of changes in mean versus changes in variability, the issue of spatial variability etc) and it provides example approaches to scenario construction.
Integration The issue of integrated assessment of climate change impacts is treated in the next chapter of the UNEP framework. “Integrated assessment” is an approach, whereby the interactions between the diversity of impacts of climate change are included and these impacts are placed in the context of other changes. The chapter provides guidance on conducting an integrated assessment of the impacts of climate change and issues of adaptation. Unlike unlinked parallel studies, which may generate important information on the impacts of climate change, but they may well lead to inconsistencies, an integrated impact study analyses the key interactions within and between sectors of a particular exposure unit, and between this unit and the outside world. Thus a comprehensive assessment of the totality of impacts, which is greater than the sum of the separate sectoral impacts, may be generated and researchers
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are enabled to place climate change impacts in a broader context such as natural resource management, sustainability of ecosystems, or economic development, and to consider the associated broader questions. The current practice in integrated assessment is discussed in this chapter and possible approaches to integrated impact assessment are presented. So far, no single best method has been found, if there is any. Instead, pragmatic approaches based on common sense dominate the field. Based on these, ingredients and considerations are put forward in order to help conduct an integrated assessment of the impacts of climate change and the possibilities of adaptation. On the other hand, integrated assessment can be done at different levels of ambition. At the very least, it should be based on consistent databases and scenarios. At a slightly more ambitious level integrated assessment would seek to avoid overlap and would try to establish consistency between the analyses of the various sectors, systems, and regions affected by climate change. At the third level of ambition, models are linked so that important feedbacks are taken into consideration. In any case, starting an integrated assessment, a considerable amount of preparatory work needs to be done. Integrated assessment is more than consistency between impact studies, while it involves outreach to and inputs from stakeholders, i.e. people affected by climate change. The chapter illustrates the various elements of and options for an integrated assessment of the impacts of climate change. Several case studies are presented and the chapter concludes with the advantages and constraints of integrated assessment. The framework outlines the following “lessons” which may be useful for those who are planning a regional or country integrated assessment of climate change impacts (UNEP, 1998, pp. 4-17, 4-18): •
• • •
The effort required to attract stakeholders and maintain scientist-stakeholder collaboration cannot be underestimated. Time and resources will need to be allocated specifically for this purpose, but the integrated assessment will be richer for it. This will also increase the probability of stakeholders becoming shareholders in the climate change impacts issue. The choice of study area will be influenced by political boundaries, but it is advantageous to consider watersheds and other ecological boundaries as well. It is essential that all scenarios and assumptions are consistent across the sectoral analyses, or integration will be hampered. A common data platform (e.g., for geographic information systems) should be identified as early as possible. This may not be easy, because of previous investments by participating agencies, institutions, etc, but incompatibility of data formats may become an important obstacle to integration. A home page on World Wide Web could be set up, but this would require additional resources, and there would be questions of access, confidentiality, and security.
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•
•
•
There is no substitute for personal contact. Communication through newsletters and reports, etc, is not enough. Electronic mail will be an important asset in coordination and communication between personal meetings and visits, but direct contact is important, especially with stakeholders. The choice of impact indicators (economic, environmental, social) should not be made in isolation from the particular situation faced in the study region or country. The specific conditions of the study area should be taken into account when choosing such measures. There is no single best way to integrate knowledge from different disciplines. Modeling exercises should be complemented by non-model approaches, including direct interaction between scientists and stakeholders during all phases of the assessment. This interaction enables the study to draw on local knowledge as well as on scientific research projects. A process that is determined by goals, not analytical tools, will result in a more successful integrated assessment.
Adaptation to Climate Change Theory and Assessment The last chapter of Part I of the UNEP guide focuses on the theory and assessment of adaptation to climate change. Adaptation refers to all those responses to climate change that may be used to reduce vulnerability, i.e. susceptibility to harm or damage potential, and to actions designed to take advantage of new opportunities that may arise as a result of climate change. Factors considered include the ability of a system to cope or absorb stress or impacts and to recover. Assessment of impacts needs to account for adaptations that are likely or even reasonable to assume to happen, otherwise the potential negative effects of climate change would be overstated. An additional reason for assessing adaptation is to inform policy makers about what they can do to reduce the risks of climate change. Several theoretical aspects of adaptation are discussed in this chapter, questions are raised and answers are provided: What are adaptation measures? Adapt to what? Who and what is it that adapts? How does adaptation occur? When does adaptation take place? What capacity to adapt? How to increase adaptive capacity? Adaptation measures have been grouped into eight categories (UNEP, 1998, pp. 5-4, 5-5) based on (Burton et al., 1993): 1.
Bear losses. All other adaptation measures may be compared with the baseline response of “doing nothing” except bearing or accepting the losses. In theory, bearing loss occurs when those affected have no capacity to respond in any other way (for example, in extremely poor communities) or where the costs
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2.
3.
4.
5.
6.
7. 8.
of adaptation measures are considered to be high in relation to the risk or the expected damages. Share losses. This type of adaptation response involves sharing the losses among a wider community. Such actions take place in traditional societies and in the most complex, high-tech societies. In traditional societies, many mechanisms exist to share losses among a wider community, such as extended families and village-level or similar small-scale communities. At the other end of the spectrum, large-scale societies share losses through public relief, rehabilitation, and reconstruction paid for from public funds. Sharing losses can also be achieved through private insurance. Modify the threat. For some risks, it is possible to exercise a degree of control over the environmental threat itself. When this is a “natural” event such as a flood or a drought, possible measures include flood control works (dams, dikes, levees). For climate change, the major modification possibility is to slow its rate by reducing GHG emissions and eventually stabilizing greenhouse concentrations in the atmosphere. In the language of the UNFCCC, such measures are referred to as mitigation of climate change and are considered to be in a different category of response from adaptation measures. Prevent effects. A frequently used set of adaptation measures involves steps to prevent the effects of climate change and variability. An example would be for agriculture: changes in crop management practices such as increased irrigation water, additional fertilizer, and pest and disease control. Change use. Where the threat of climate change makes the continuation of an economic activity impossible or extremely risky, consideration can be given to changing the use. For example, a farmer may choose to substitute a more drought tolerant crop or switch to varieties with lower moisture. Similarly, crop land may be returned to pasture or forest, or other uses may be found such as recreation, wildlife refuges, or national parks. Change location. A more extreme response is to change the location of economic activities. There is considerable speculation, for example, about relocating major crops and farming regions away from areas of increased aridity and heat to areas that are currently cooler and which may become more attractive for some crops in the future. Research. The process of adaptation can also be advanced by research into new technologies and new methods of adaptation. Educate, inform, and encourage behavioral change. Another type of adaptation is the dissemination of knowledge through education and public information campaigns, leading to behavioral change. Such activities have been little recognized and given little priority in the past, but are likely to assume increased
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importance as the need to involve more communities, sectors, and regions in adaptation becomes apparent. Assessment of adaptation measures requires evaluating how well different practices and technologies will avoid adverse climate change impacts by preventing or minimizing them, by enabling a speedy and efficient recovery from their effects, or by taking advantage of positive impacts. Several options that have been applied to the evaluation of climate change adaptation measures are provided and techniques are described in the sectoral chapters of the Handbook. Some of them rely heavily on expert judgment and have limited data needs, whereas others involve quantitative analysis and require more resources. To select the appropriate assessment methods, the following criteria should be considered (UNEP, 1998, pp. 5-11, 5-12): 1.
2.
3. 4.
How well the method addresses the goals and objectives of the assessment (e.g., the level of precision needed for decision making, the usefulness of the tool for building consensus). The ability of the method to address uncertainties (e.g., related to the magnitude of impacts, the timing and spatial pattern of impacts, the effectiveness of adaptation measures, and future socio-economic conditions). The availability of inputs (e.g., data from impact assessments, socio-economic data, cost estimates). The availability of resources (e.g., time, expertise, money).
Based on these criteria, a range of qualitative and quantitative approaches for weighing the trade-offs among adaptation measures are reviewed (UNEP, 1998, pp. 5-12 to 5-20). Many of these options can be used in combination. The following methods are reviewed: • • • • • • • •
Forecasting by analogy Screening to identify anticipatory adaptation measures Tool for environmental assessment and management Adaptation decision matrix Benefit-cost analysis Cost-effectiveness analysis Approaches for addressing uncertainty and risk Implementation analysis.
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A note on the framework’s approach to the treatment of the concepts of uncertainty and risk has been included in the previous chapter of this book.
Sectoral Chapters Part II of the UNEP framework includes chapters on different sectors (agriculture, water resources, energy etc), where an extensive focused discussion on all issues analysed in Part I is made. Thus, in each sectoral chapter, the nature and scope of the problem is presented. Then an array of methods for assessing potential socioeconomic impacts is given and different scenarios are developed. Finally, the types of adaptation measures that may be applicable to each sector are identified and evaluated.
THE UK CLIMATE IMPACTS PROGRAMME FRAMEWORK Scope and Structure The UK Climate Impacts Programme framework was first published in 2003 under the title “Climate Adaptation: Risk, Uncertainty and Decision-making” (Willows & Connell, 2003). Its overall objective was to provide guidance that helps decisionmakers and their advisors (i) take account of the risk and uncertainty associated with climate variability and future climate change and (ii) identify and appraise measures to mitigate the impact or exploit the opportunities presented by future climate, that is, to identify good adaptation options. In particular, the report provides guidance to help decision-makers answer the questions: (i) (ii) (iii) (iv)
What are the climate and climate change risks that could affect their decision? Should climate change influence their decision? What adaptation measures are required, and when? What adaptation measures would be most appropriate?
The report is structured in two parts. Part 1 lays out the eight stages of the decision-making framework, provides guidance on its use, and recommends tools and techniques that may be applied at each stage. Part 2 provides frameworksupporting material regarding aspects of risk assessment in general, or risk-based climate change impact assessments in particular.
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The Eight Stages for Decision-Making The decision-making framework identifies and analyses eight key stages. The stages are grouped as follows: Group I Structuring the problem: ◦ Stage 1 Identify problem and objectives; ◦ Stage 2 Establish decision-making criteria, receptors, exposure units and risk assessment endpoints; Group II Analysing the problem: ◦ Stage 3 Assess risk; ◦ Stage 4 Identify options; ◦ Stage 5 Appraise options; Group III Decision-making: ◦ Stage 6 Make decision; Group IV Post-decision actions: ◦ Stage 7 Implement decision; ◦ Stage 8 Monitor, evaluate and review. For each of the above stages key issues to be considered, questions to be answered and appropriate tools and techniques to be applied are defined. The eight stages framework is characterized by the following features: it is circular, emphasising the importance of the adaptive approach to managing climate change problems and implementing response measures, it encourages feedback and iteration, so that the problem, objectives and decision-making criteria can be refined and, finally, certain stages (3, 4 and 5) are tiered, which allows the decision-maker to identify, screen, prioritize and evaluate climate and non-climate risks and options, before deciding whether more detailed risk assessments and options appraisals are required. The tasks at each stage of the framework may be summarized as follows (Willows & Connell, 2003, pp. 10-40): Stage 1. Identify problem and objectives In stages 1 and 2 the problem is structured, i.e. the nature of the decision problem and the objectives and criteria that help differentiate between options are defined and the decision-making criteria, receptors, exposure units and risk assessment endpoints are established. The need to revisit these two stages, following a risk-based assessment of climate change, is emphasized. In particular, at Stage 1, key questions to be answered include, among others: 1.
Where does the need to make the decision come from? What are the main drivers behind the decision? What beneficial objectives are intended?
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2. 3. 4. 5. 6. 7.
Is the problem explicitly one of managing present-day climate or adapting to future climate change? If the main driver is not related to climate or climate change, is climate change believed to be a factor in the problem? Is it a policy-, programme or project level decision? Who or what will benefit or suffer as a consequence of the problem being addressed? Have timescales been established for making and/or implementing a decision? Is the decision expected to provide benefits in the long-term (> 10 years) or have other long-term consequences?
Stage 2. Establish decision-making criteria At Stage 2, key questions for decision-makers and risk analysts include, among others: 1. 2.
3.
4.
Have receptors at risk and the exposure unit been defined? Have assessment endpoints or thresholds been identified as a basis for assessing risk to the exposure unit and receptors? Can assessment endpoints be analysed in terms of: a) past records and future scenarios of climate variability? b) other non-climate factors? Can assessment endpoints be developed to provide a basis of quantitative (Tier 3) risk assessments (Stage 3) if required? Have assessment endpoints and timescales over which they will be assessed been agreed between decision-makers (policy-lead, programme officer or project manager), stakeholders, and risk assessors? Have all project management issues been agreed? For example, are the resources and time allocated to undertake the risk assessment reasonable and proportionate to the importance and urgency of the decision problem? Are the objectives clearly defined and achievable? Are the necessary expertise and data accessible?
Stage 3. Assess risk (tiered) Stage 3 includes 3 tiers. At this stage, the climate change risks associated with the decision are formally identified and assessed, alongside other non-climate risks. Tier 1 Preliminary climate change risk assessment In particular, at Tier 1 (preliminary climate change risk assessment), key questions include: 1.
What is the lifetime of the decision? Over what period are the benefits of the decision expected to be realized?
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2.
3.
4.
5.
6.
Which climate variables are likely to be significant in relation to meeting the decision criteria? Does information on past variability in climate or past extremes of weather indicate potential vulnerability to climate change? How might future changes in these climate variables affect the decision and ability to meet the decision criteria? Are certain climate variables likely to be of greater significance than others? If an initial portfolio of options exists, is it possible at this stage to judge the potential significance of the impacts of climate change to the options? Is the risk posed to certain receptors likely to be of key importance to the choice of option? Is there uncertainty regarding forecasts of particular climatic hazards, or their associated impacts? Can the level of confidence associated with particular hazards and their impacts be determined? Can any climatic variables or impacts be screened out at this stage?
Tiers 2 and 3 Qualitative and quantitative climate change risk assessment At Tiers 2 and 3 of Stage 3 (qualitative and quantitative climate change risk assessment) key questions include: 1. 2. 3. 4. 5.
Given the various options identified previously, what are the risks of failing to meet the criteria posed by climate change and by non-climate factors? What are the most important consequences? Which are the key hazard factors? How are the consequences dependent upon the hazards? Are some of the options more vulnerable to these factors than others? What tools should be used to analyse risks? Do these reflect the scale of the problem, its complexity and data availability? Could other tools be adopted which would allow more explicit consideration of climate change risk, including estimates of probability, analyses of uncertainties and the significance of key assumptions?
Stage 4. Identify options (tiered) Stage 4 aims to identify options that are robust to climate change, and provide the greatest likelihood of meeting the objectives and criteria defined in Stage 2. Key questions for this stage include: 1.
What type of options should be considered? What are the likely consequences of the ‘do nothing’ option, or of not adjusting existing options to take account of forecast changes in climate?
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2.
3. 4.
5.
If the risk assessment stage has identified climate change as a significant factor for the decision, then can options be identified that are more robust to climate change? Can ‘no regret’ and ‘low regret’ options be identified? Can the options be defined in a flexible manner to allow for sources of uncertainty? Can adaptation options be identified that could be increased at a later date, or implemented separately or in combination or in sequence to provide flexible levels of response to risk? Could staged options be appropriate? Would it be feasible or advisable to delay making a decision until further information is available?
Stage 5. Appraise options (tiered) Stage 5 is about options appraisal. It aims to find options with lower social, economic and environmental consequences. Key questions include: 1.
2. 3. 4.
5. 6.
How do options rate in relation to the criteria and risk assessment endpoints established at Stage 2, and as informed by the Stage 3 risk assessment? Can different levels of confidence be attached to the likely performance of different options? If so, what are they? Can particular options be confidently excluded because they are unlikely to meet the acceptability criteria? Are more precise definitions (operational definitions) of these criteria to appraise the options needed? Would other criteria have led to a different form of options appraisal? Would further, more detailed Stage 3, 4 or 5 (Tier 2 or Tier 3) assessments provide a basis for improved discrimination between options, or help develop better options? Have, during Stage 3, the risks associated with implementing each option been identified? Could the options being considered possibly constrain other decision-makers’ ability to adapt to climate change (i.e. contribute to climate mal-adaptation)?
Stage 6. Make decision At Stage 6 the decision is made. This stage demands that the decision-maker forms a judgement that all issues revealed during the decision-making process have been addressed. Key questions include: 1. 2.
Is there a clear ‘preferred’ option? Could the adoption of different criteria (including any weights applied to criteria) and approach lead to the choice of a different option?
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3.
4. 5. 6.
7.
8.
If there is not a clear preferred option, was the problem defined correctly at Stage 1, or could it be re-defined? Were the criteria chosen in Stage 2 adequate? If not, are better criteria needed? Has the specification of the problem and objectives under Stage 1 proved adequate in light of analysis under Stages 2-5? Does the manner in which risk and uncertainty was accounted for allow for robust decision-making? Does the assessment provide a clear understanding of the importance of risk and uncertainty? Are information and data presented in a form that decisionmakers can readily use? Are circumstances described (e.g. climate or non-climate scenarios) where the decision might fail to meet the established criteria? Has the decision-maker’s attitude to risk and uncertainty changed as a result of the assessment (particularly with regard to risks associated with climate change)? Does the decision arrived at have implications for others’ decisions? Will it help or constrain climate adaptation by other decision-makers?
Stage 7. Implement decision Stage 8. Monitor, evaluate and review Finally, at Stages 7 and 8, post-decision actions are taken: decision implementation and monitoring, evaluation and review to check whether the expected benefits of the decision are delivered.
Tools and Techniques At each stage, the UKCIP framework offers guidelines and recommends useful tools and techniques, which may help the analysts to perform the respective task. For example, for Stage 6 (decision making), the Guide recommends the tools and techniques appearing in Table 1 (Willows & Connell, 2003, p. 38). As may be noticed, several tools and techniques are recommended, which are case specific. For example, in the case of Stage 6, for decision criteria of a probabilistic nature, two alternative analytical approaches are recommended, Expected Value and Portfolio Analysis. In other cases, the tools and techniques recommended are generally different than the above and are diversified according to different criteria. As an example, in the case of Stage 4 (options identification), the tools recommended (generally different than the ones recommended for Stage 6), should be chosen based on the familiarity with the issues raised and the number of stakeholders. Other stages (notably, Stages 3 and 5), are characterized by a bigger variety in terms of tools and techniques recommended and respective criteria of usage.
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The framework includes in Appendix 1 an example application of the decisionmaking framework, which aims to provide a simplified illustration of the application of the guidelines. Appendices 2 and 3 offer a Glossary and a summary of tools and techniques, respectively. The latter gives short definitions of the tools and techniques, like the ones appearing in Table 18, which are recommended at each stage of the process. Part 2 of the UKCIP framework is particularly useful, as it provides an extensive analysis of key issues involved in any situation concerning decision making under climate change. In particular, the concepts of risk, uncertainty and its types, assessment of climate change impacts, risk analysis and risk-based decision-making are presented. Decision-making with climate change uncertainty is treated with reference to climate change adaptation strategies and options. Part 2 is concluded with a presentation of key aspects of climate change risk assessment. Elements of the framework’s contribution to the treatment of the above concepts have been used in the previous chapter.
THE AUSTRALIAN GREENHOUSE OFFICE FRAMEWORK Scope and Structure The Australian Greenhouse Office framework (Australian Greenhouse Office, 2006) is intended to be a guide to integrating climate change impacts into risk manageTable 1. Tools and techniques for Stage 6 Tool/Technique
Simple decision criteria
Hedging and flexing
√
Minimax, Maximin, Maximax and Regret
√
Probabilistic decision criteria
Expected Value
√
Portfolio Analysis
√
Decision sensitivity
√
Sensitivity Analysis
√
Robustness Analysis
√
Ranges and Intervals
√
Deliberate Imprecision
√
Pedigree Analysis
√
Policy Exercise
√
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ment and other strategic planning activities in Australian public and private sector organizations. Its purpose is to assist Australian businesses and organizations to adapt to climate change and is directed to elected representatives and directors, general management of organizations and specialist risk managers or external risk experts. The prime focus of the Guide is on the initial assessment and prioritization of these risks. The Guide aims, in particular, to help businesses and organizations enumerate risks related to climate change impacts, prioritize risks that require further attention and establish a process for ensuring that these higher priority risks are managed effectively. It was developed through a series of case studies with four partner organizations, including a large private company, a public utility, a government agency and a local government. It should be noticed that the Guide is one of the documents available by the Australian Greenhouse Office and intended to assist strategic planning activities in Australia (e.g. Australian Greenhouse Office, 2006a). The Guide is separated into three parts. Part A describes what the Guide is about. In particular, it discusses why there is a need to assess climate change risk and the fundamentals of risk assessment and management. Part B outlines how to conduct an initial strategic assessment centred on a workshop process. In particular, it describes the tasks and necessary steps that must be taken in preparation before the workshop process itself and how to effectively identify, analyse and evaluate the risks to the organization arising from changes in climate, the actions and responses required post-workshop in order to treat the identified risks. Finally, Part C outlines some of the considerations that arise if a more detailed analysis of some specific risks is required and sets the risk assessment in the broader context of strategic planning and management, dealing with the wider questions of the preparation, planning and integration of the risk assessment in an organization’s normal processes for planning and management. A summary checklist of tasks and hints and a glossary of climate change and risk management terms are provided as appendices. Part A of the Guide is introductory in the sense that it outlines the major aspects of climate change and the fundamental concepts of risk assessment and management, while making the link between climate change and risk. Parts B and C are the core of the Guide, since they provide the methodological framework needed for a systematic analysis in order to integrate climate change impacts into risk management and other strategic planning activities of an organization. The framework is about assessing risks related to climate change at an initial level (initial assessment) and, if needed, proceeding to detailed analysis. An initial assessment identifies and sifts risks quickly, followed by treatment planning and implementation for those risks that clearly require it. Detailed analysis is used where additional information is needed to determine whether treatment is required or what form of treatment to adopt. Initial assessment is considered by the Guide to be the stage at which most of its users will be able to make the greatest gain with the least effort. This is where, Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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with relatively simple summary climate change information and a straightforward risk management approach, significant insights may be generated leading to early and effective action. This stage is a cost effective, yet rigorous method of identifying and appraising risks. Its use is intended to capitalize on any immediate insights arising from a simple analysis where, once a risk is documented, it is clear that it needs to be addressed through adaptation or other treatment measures. It permits issues not requiring any further consideration to be set aside as early as possible. It also allows for more detailed technical analysis of risks to determine if they require attention or to determine the most effective treatment. The Guide suggests a workshop as a generally most efficient method for undertaking the initial assessment. The process effectively falls into three overall stages (Australian Greenhouse Office, 2006, p. 23): 1.
2.
3.
Before holding a workshop, it is essential to establish the context of the initial assessment process by determining climate change scenarios that will be used in the assessment; defining the scope of the assessment; considering stakeholders; and establishing the evaluation framework. The risk workshop is a focused activity designed to identify, analyse and evaluate risks so that the highest priority issues can be addressed with an appropriate level of effort and urgency. After the workshop, the most severe risks can be tackled with treatments to reduce their likelihood or deal with the consequences of the risks if they do arise.
Part B of the Guide sets out, step by step, these stages of the initial assessment process.
Conducting an Initial Assessment An initial assessment is conducted in three steps: Step 1. Establishing the context Establishing the context takes place before the workshop. The context for risk management sets up a framework for identifying and analysing risks. It places the assessment on a clear foundation so that everyone works from a common understanding of the scope of the exercise, how risks are to be rated and how the analysis is to be approached. It consists of five parts (Australian Greenhouse Office, 2006, p. 26): 1.
Climate change scenarios – defining how the climate will be assumed to change in the future.
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2. 3. 4.
5.
Scope – defining the scope of the assessment including activities to be covered, geographic boundaries and the time horizon. Stakeholders – determining whose views need to be taken into account, who can contribute to the analysis and who needs to know its outcomes. Evaluation framework – defining how risks will be evaluated by clarifying the objectives and success criteria for the organization and establishing scales for measuring consequences, likelihoods and risk priorities. Key elements – creating a framework that will assist in identifying risks by breaking down the organization’s concerns into a number of areas of focus and relating them to the climate scenarios.
Step 2. Identifying, analyzing and evaluating the risks. This is the step that takes place at the workshop. Identifying, analyzing and evaluating the risks are best undertaken as a single exercise in a workshop setting. They must generate a list of risks associated with climate change that is as comprehensive as possible, not overlooking any major area of exposure, and do so as efficiently as possible. At the conclusion of these tasks a list of risks and existing controls that tend to mitigate them will have been created, with consequence and likelihood ratings in each scenario that has been decided to be considered and an agreed overall priority rating for each risk to the organization. During this step, each key element and each climate change scenario in turn are taken and the following routine risk workshop exercise is recommended by the Guide (Australian Greenhouse Office, 2006, p. 44): 1. 2.
Brainstorm risks associated with the element until the main issues are felt to have been exposed. Taking each risk in turn: ◦ identify any existing controls (features of the environment, natural and man made structures and mechanisms, procedures and other factors) that are already in place and tend to mitigate the risk; ◦ describe the consequences the risk would have if it was to arise, given the controls, and in each of the scenarios under consideration; ◦ describe the likelihood of suffering that level of consequence, again given the controls, in each of the scenarios under consideration; ◦ assign an initial priority in each scenario based on the likelihood and consequence of the risk; and ◦ where two or more scenarios are being examined, consider adjusting the priority in recognition that some scenarios are less likely to occur than others.
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3.
Return to (1) for the next key element.
Comprehensive advice on the operation of the process can be found in the Standards Australia Handbook HB 436, a companion to the Standard AS/NZS 4360. In particular, the first of the tasks in step 2, namely identifying risks, refers to the chance of some things happening that will have an impact on the organization’s objectives. A brainstorming approach to risk identification encourages all participants to raise issues and provide opportunities for the contributions of one person to spark ideas for others. The second task, namely, analysis of risks, assigns each risk a priority assuming that each of the climate change scenarios being considered arises. It takes account of any existing factors that will operate to control the risk, which may be features of the environment, existing practices by which people can adapt as the climate changes or other trends that will happen at the same time and modify the effects of the risk. Finally, the third task, evaluation of risks, aims to ensure that the priority ratings are consistent with one another and match the participants’ general view of the context within which they are operating. When all key elements have been considered, all the risks are assembled into a single set in priority order and are reviewed as a whole. The outcome will be a list of risks with all the information recorded in the identification and analysis as well as the agreed priority allocated in the evaluation review. After the above tasks are completed, a review of the initial assessment follows, which is an extension of the risk evaluation task. The aim of the review is to place risks into the following categories: • • •
risks that should be treated immediately without further analysis and for which the appropriate treatment is clear; risks that can be set aside without further action for the time being; risks that will require more detailed analysis before determining whether to treat them or not or to select the most appropriate form of treatment.
Step 3. Treating the risks Treating the risks is the step taking place after the workshop. It consists of determining the most cost-effective actions to be undertaken in response to the identified risks and implementation of those actions. This will usually result in the modification of existing strategies and plans, the development of new plans, allocation of resources and responsibilities for the plans and their implementation. The formulation and implementation of actions is a matter for the routine operating practices of the organization. These activities constitute what is referred to as adaptation (as distinguished from short term, reactive adjustments). Εssentially, they are adjustments Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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of an organization involving strategic planning and the allocation of new resources (e.g. technological and infrastructure measures, planning, research and education or a combination of actions) in response to climate change that lead to a reduction in risks or a realization of benefits. The Guide provides an overview of different types of possible measures that can be adopted as risk treatments (Australian Greenhouse Office, 2006, Table 17, p. 49). As an example, regarding structural and technological treatment, which is described as preventing effects through engineering solutions and changed practices, the following measures are suggested: • • • • • • •
Increase reservoir capacity Implement energy demand management measures Scale up coastal protection measures Change design of storm-water systems Build more resilient housing Install more efficient irrigation systems Create wildlife corridors.
As another example, the regulatory and institutional treatments suggested (that is, preventing or mitigating effects through revised regulations and planning) include the following: • • • • • • • •
Adopt integrated planning approaches Amend local planning schemes to give greater weight to flood risk Revise guidance notes for urban planners Amend building design standards Increase resources for coastal planning Factor climate change into criteria for designation of species or ecosystems requiring increased protection Improved contingency and disaster planning Lengthen strategic planning horizons (from say 5-10 years to 20-30 years).
The Generic Principles The Guide provides a synopsis of generic principles of ‘good climate risk treatment’ drawn from the literature on climate change adaptation processes (Australian Greenhouse Office, 2006, p.50): Principle 1. Achieve balance between climate and non-climate risks. By applying this principle, an organization may avoid under- or over-adaptation. This is best achieved by integrating climate change risk management with the broader risk management processes of the organization. Ideally, all forms of risk Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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management operating within an organization will be integrated with one another and with all general management processes. Principle 2. Manage priority climate change risks. By applying this principle, an organization may focus on high priority risks (i.e. extreme and high risks). This principle actually expresses in the special case of climate change the general rule that it is necessary to set priorities for the allocation of management attention and resources. Principle 3. Use adaptive management. Adaptive management is about putting in place small, flexible, incremental changes based on regular monitoring and revision of plans using information available at the time, rather than relying on one-off, large-scale treatments. It leaves scope for decisions about treatments to be reviewed in the future as improved information becomes available about the nature of climate change risks. Principle 4. Look for win-win or no-regrets treatment options. Win–win treatments refer to measures that address the targeted climate change risk while also having other environmental, social or economic benefits. No-regrets treatments are measures that should be undertaken anyway, regardless of whether climate change is an issue. The Guide provides the following examples of no-regrets and win-win treatments (Australian Greenhouse Office, 2006, Table 18, p. 51): Win-win treatments: • • •
changed cropping in response to climate change leads to reduced soil erosion climate change risk treatment by an electricity distribution company increases reliability of customer supply strategic response to climate change by a local government helps to build community networks. No-regrets treatments:
• •
treatment measures that are cost neutral - maybe involving an initial capital investment but reducing overall costs in the longer term improved management practices by an organization (e.g. strategic planning).
Principle 5. Avoid adaptation constraining decisions. This principle implies that organizations should avoid taking decisions that will make it more difficult for them or others to manage climate change risks in the future (“adaptation constraining decisions”), such as in the case where a local council permits a residential development in a flood-prone area. Principle 6. Review treatment strategy.
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This principle is about the need for regularly reviewing the climate change risk treatment strategy as part of the monitoring and review step.
Other Considerations Finally, Part C considers several other issues. In particular, it considers the case where more detailed analysis may be needed for some risks before the need for treatment or the nature of appropriate treatment measures can be determined. Detailed analysis may be needed to: • • •
address uncertainty in the likelihood, projected level or rate of change to climate variables, i.e. understand the climate change itself; analyse the sensitivity of particular risks to changes in climate variables, i.e. understand the way operations will be affected by climate change; or assess treatment options.
For the first, addressing uncertainty, some organizations may decide that, in order to assess a risk, more detailed analysis is required on one or more climate variables to reduce the uncertainty in projections. In order to reduce uncertainty about the likelihood of changes the Guide recommends specialists’ support, while it refers to the estimates of confidence in projected changes to extreme events and other climate variables provided by IPCC and other sources. Reducing uncertainty about regional and local changes may be treated similarly, by using specialists’ advice and climate change reports providing state, regional and even site-specific information on projected changes. Understanding sensitivity to climate change refers to analysing the degree to which an area or activity will be affected, either adversely or beneficially, by a particular change in climate or a climate-related variable. Organizations may need to determine the point (threshold) at which changes to a climate variable begin to matter as well as the point (critical threshold) at which a change to a climate variable will have a catastrophic effect on the organization’s activities or assets if the risk remains untreated. Once a change to a climate variable passes an initial threshold, an analysis may be required, drawing on expertise in the operations relevant to the organization, regarding where the threshold lies. Even when the threshold at which change starts to matter is clearly defined, it may still be a challenge to determine whether and how far into the future that point is likely to be reached. Expertise in the organization’s operations and in climate science will generally both be required for a detailed analysis of climate sensitivity. Such studies may be a significant undertaking and it is important to use the initial assessment to set priorities to ensure that
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they are not devoted to risks that are insignificant or for which it is clear, without further study, that action is required. Finally, assessing treatment options refers to the case when a risk is well understood and it is clear that some treatment will be required. In this case detailed analysis of treatment options may be required concerning costs and benefits of each option and level of risk mitigation. Available options depend on the organization’s adaptive capacity to respond to climate change, particularly its vulnerability, i.e. the extent to which it can cope with climate change. Adaptive capacity is defined as the ability of a system or an organization to adjust or respond to climate change or moderate the potential risks of climate change to its assets or activities. Factors which can increase adaptive capacity include: •
•
Good information available to the right people within the organization and to relevant stakeholders and effective monitoring or other programs in place to detect changes that are occurring. Flexibility of assets or activities at risk and sufficient resources for treating a risk.
On the other hand, other risks may reduce adaptive capacity. As said above, assessment of costs and benefits of treatment options are included in a detailed analysis. For this, a range of quantitative, semi-quantitative or qualitative tools or techniques may be employed (e.g. Cost-Benefit Analysis or Multi-Criteria Decision Analysis). Organizations may consider seeking external advice when undertaking detailed assessment of treatment options. Apart from the detailed analysis, Part C of the Guide makes reference to the preparation and planning activities in any risk management exercise related to climate change, and to the need for a fully integrated risk management system, giving specific recommendations. Planning is regarded as critical factor to the success of such an exercise and should include engagement of the people required to sanction, execute and act upon the outcomes of the analysis, acquisition of relevant information, specification of timing of activities, and obtaining the resources required for the administration, facilitation and data recording components of each task. Major preparatory steps for initiating a climate change risk management process include reviewing any existing risk management processes or earlier examination of climate change, if any, within the organization, determining how climate change risk management will be integrated with other processes, identifying the sponsor and the audience for the output of the process, determining how any actions flowing from this process will be inserted into routine operational activity with appropriate resources and controls, etc (Australian Greenhouse Office, 2006, p. 61). Key tasks in the project plan for the initial assessment include checking that the latest climate
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change scenarios relevant to the organization are available, establishing the context of the initial assessment, identifying who will plan and manage the work, identifying the participants in the workshops, etc. Regarding integration with existing risk management practices, the Guide discusses two extremes put in place by organizations concerning risk management: building on a fully integrated risk management system, where skilled resources can be applied to climate change risk management and many members of the organization’s personnel are familiar with the general working of the process, and starting ‘from scratch’, in the case of organizations having no existing risk management systems. In the latter case, the organization may find in the Guide all the basic information required to establish a climate change risk management process. Finally, for the integration of the above with other activities, it makes sense to combine climate change risk assessment with the organization’s strategic planning process, as this can help to resolve the causes and consequences of risks and allow similar issues with long-term impacts to be considered together. Given the timescale of climate change and related developments, it is likely that major reviews will take place about once a year.
THE NEW ZEALAND CLIMATE CHANGE OFFICE FRAMEWORK Scope and Structure One more manual is presented in this chapter, which, although designed to help local governments identify and quantify opportunities and hazards that climate change poses for their functions, responsibilities and infrastructure, it may be helpful as a general analytical framework for decision structuring regarding adaptation in view of climate change, i.e. for decision making in cases other than local governments. Under the title “Climate Change Effects and Impacts Assessment: A Guidance Manual for Local Government in New Zealand - 2nd Edition” the Ministry for the Environment of New Zealand published in May 2008 a guidance manual for local government in New Zealand (Ministry for the Environment, 2008). It should be noted that, in the case of regional councils, their functions may include management of regional water, air and land resources, biosecurity, natural hazards management, emergency management, and regional land transport. For city and district councils, these functions include land-use planning and decision-making, building control, emergency management and provision of infrastructure and community services. Also, local authorities own community assets that may be vulnerable to climate change effects. Thus, in the mix of the functions of local governments, some basic functions undertaken also by companies are included, in addition to the typical ones for this Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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kind of organizations. In any case, the manual’s approach may be easily adapted to serve the purpose of company adaptation to climate change. The manual is one of several tools produced by the Ministry for the Environment of New Zealand in order to help local governments to cope with the effects of climate change (see, for example, the “Coastal Hazards and Climate Change - A guidance manual for local government in New Zealand” (The New Zealand Climate Change Office, 2004)). Noting that climate change will, by and large, not create new risks, but may change the frequency and intensity of existing risks and hazards, as well as introduce some long-term shifts in climate regimes across the country the manual: • • • • • •
provides projections of future climate change around New Zealand compares these projections with present climate extremes and variations identifies potential effects on local government functions and services outlines methods for assessing the likely magnitude of such effects explains how this information can be applied to assess the risk associated with various climate change impacts provides guidance on incorporating climate risk assessment into local government regulatory, assessment and planning processes.
The manual is user friendly as, in order to help users find the information relevant to their needs, it provides two ‘roadmaps’, that set out the steps involved in typical assessments and show where to find key guidance for these steps. It is structured as follows: first, key issues for councils are summarized and approaches to identifying effects and adapting to changes are outlined. Then new projected changes in New Zealand’s climate are given for six scenarios of GHG emissions, based on the IPCC Fourth Assessment (IPCC, 2007). The relationship to current climate variability and change is outlined, and the perspective of natural variations being superimposed on a long-term warming trend, thus together creating extremes, is discussed. The effects on local government functions and services, particularly how to identify what will be materially affected, are analysed. In the subsequent chapter of the manual, the issue of developing scenarios and tools for initial screening and more detailed studies are introduced. The risk assessment procedure is then described in the context of climate change. The manual concludes with a chapter on the integration of climate change risk assessment into council decisions.
How to Assess Climate Change The manual begins with a summary of key issues for councils while outlining approaches to identifying effects and adapting to changes. An incremental approach to risk assessment is recommended, which should begin with an initial screening Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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assessment. This assessment uses simple initial estimates of how the relevant climate factors may change, with expert judgement or simple calculations of likely impacts of these changes, to test the significance of the changes for a council’s activities. Further detailed analyses are justified only if these screening studies suggest that a material impact is possible. This screening approach can be applied to a particular function, asset or activity, or it can be applied across all of a council’s activities. Climate change effects should be considered as part of existing regulatory, assessment and planning activities with which councils address extreme weather events and climate variations as they develop plans and provide services. It is not necessary or even advisable to develop a whole new set of procedures for dealing separately with the impacts of climate change, but it is vital to integrate climate change into standard considerations to ensure that council activities are ‘future-proofed’ and remain sustainable for future generations. In particular the manual makes the following key points (Ministry for the Environment of New Zealand, 2008, p. 1): •
•
•
•
The climate is changing. It is internationally accepted that further changes will result from increasing amounts of GHGs in the atmosphere. Climate change effects over the next decades are predictable with some level of certainty, and will vary from place to place throughout New Zealand. The climate will also change from year to year and decade to decade owing to natural processes. For example, some parts of the country often have dry summers and autumns when an El Niño climate pattern is present. Both natural fluctuations and human-induced climate changes need to be considered when developing adaptation plans and policies. Councils already address extreme weather events and climate variations as they develop plans and provide services. Climate change effects should be considered as part of these regulatory, assessment and planning activities. It is not necessary to develop a whole new set of procedures for dealing separately with effects and impacts of climate change. Rather, they can be built into existing practices. Responding to climate change is an iterative process. It will involve keeping up-to-date with new information, monitoring changes and reviewing the effectiveness of responses.
How to Identify What will be Materially Affected Projected changes in New Zealand’s climate are given in an extensive discussion in the manual for six scenarios of GHG emissions. The projections are based on the IPCC Fourth Assessment Report (IPCC, 2007). Changes are specified for 2040 Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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(actually the 2030–2049 average), and for 2090 (the 2080–2099 average), relative to the climate of 1990 (1980–1999 average). Natural variations will be superimposed on a long-term warming trend, and together they will create extremes to which future New Zealand society will have to adapt. What currently is an unusually warm year could be the norm in 30–50 years, while an unusually warm year in 30–50 years’ time is very likely to be warmer than anything we experience at present. The manual provides information and guidance that may help individual councils identify which of their functions are likely to be materially affected. It summarizes data, sources of information, models and specialist expertise available in New Zealand. It also provides some examples of work that some local authorities have already undertaken. It is pointed out that climate changes of the magnitude projected could have significant effects on various council functions and activities. These effects will often be different in different parts of the country, and may be negative, positive or mixed. The range of local and regional functions, services and activities on which climate change could impact is wide. It includes strategic and land-use planning, water supply and irrigation, storm water and flood management, roading, coastal infrastructure, management of terrestrial and aquatic ecosystems, civil defence and emergency management, and biosecurity. Key points in the manual concerning the assessment of the effects of climate change refer to a number of manageable steps, which should be taken. First, local government functions and possible climate change outcomes are outlined and data concerning the sensitivity of natural resources to present climate and climate change are provided. These should be used in order to identify specific resource effects relating to identified functions and services, and associated climate variables. This information, in association with material concerning scenario development (see next paragraph) should be used in order to evaluate whether climate change is likely to be a consideration in the particular area or issue, should an initial screening analysis be undertaken. Then, a decision should be made on the need for further information and analysis. In order to identify relevant sources of information and expertise, data, sources of information and assessment capabilities relating to the effects of climate change are provided in the manual. Next the limitations (assumptions and assessment capability) that exist should be identified as far as possible. Several examples are given as a guide to summarising the above information for the particular area or issue. Finally, any published information should be reviewed and, if appropriate, relevant experts should be consulted.
Developing Scenarios According to the manual, a scenario is a plausible description of how the future may develop, based on a coherent and internally consistent set of assumptions Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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about key drivers. Climate, social and economic scenarios can be formulated that span the likely range of future conditions. These are then used together with expert knowledge and models of the sensitivity of natural or managed systems to climate to deduce a range of possible climate impacts on selected council activities and services. To make a definitive single quantitative prediction of exactly how much a particular climatic element will change over the coming decades is not feasible, because rates of climate change will depend on future global emissions of GHGs, which in turn depend on global social, economic and environmental policies and development. On the other hand, incomplete scientific knowledge about some of the processes governing the climate, and natural year-to-year variability, contribute to uncertainty about the future. Therefore, it is necessary to consider a range of possible futures, that is scenarios, when assessing climate impacts and developing adaptation strategies. Chapter 5 provides guidance on undertaking scenario analyses, including tables of values and sources of climatic information for use in both initial screening assessments and more detailed studies, while several examples are provided. When developing future scenarios, the manual suggests several key points to be considered, including the following (Ministry for the Environment, 2008, p. 61): •
•
• •
Identify the scenario categories to be explored. The principal category will be climate change, but it may also be appropriate to consider changes in population and land use, for example. Consider the cost involved with different scenario approaches and the relative sensitivity of the natural resource to the effects that are to be examined. This will influence the scenario approach to be taken. Identify additional expertise that will be required to quantify other scenarios and to quantify effects. Remember always that, whichever scenarios are chosen, they will be bound by important assumptions and thus will provide information only on plausible futures.
In addition the manual gives specific guidance for a staged approach to assessments. In particular, it provides information for developing initial scenarios for screening assessments, and for undertaking more in-depth studies if a screening assessment indicates these are warranted. It also recommends the usage of the published information on climate change scenarios, particularly the CLIMPACTS system (Warrick et al., 2001) - where appropriate - which focuses on climate change effects and adaptation in New Zealand and contains results from quantitative assessments. Consultation of relevant experts, to identify the specific scenarios to be used, is generally recommended. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Risk Assessment For the purposes of New Zealand’s manual, risk is the chance, measured in terms of consequence and likelihood, of an ‘event’ (e.g. a flood, very high winds or a drought) being induced or significantly exacerbated by climate change, that event having an impact on something of value to the present and/or future community. Consequence (or impact) is defined as the outcome of an event, expressed qualitatively in terms of the level of impact, and can be measured in terms of economic, social, environmental or other impacts. Likelihood is defined as the probability or chance of something happening and can be a qualitative or quantitative measure. Risk assessment in view of climate change, where local government organizations are involved, is a systematic process undertaken in order to identify risks associated with climate change, compare them equitably against other risks and hazards, prioritize them and develop long-term adaptation plans or make specific decisions taking into consideration that resources are limited and priorities must be set for where to apply them as appearing in Figure 1 (Ministry for the Environment, 2008, Figure 6.1, p. 74). This process should also be undertaken in other cases where organizations have to make long-term decisions in view of climate change, including decisions on asset management and planning. The guide describes two steps which have to be made: first the screening assessment which will help determine whether a formal risk assessment is necessary for the issue being considered; and, second, a formal risk assessment process intended for identifying and evaluating risks for a single issue, applicable also to the local authority’s operations as a whole. The manual makes the following key points for risk assessment (Ministry for the Environment, 2008, p. 72): • •
• • •
Use risk assessment techniques to rank risks, and include ranking types of climate change risks against each other and against other risks. Do a screening assessment of the issue first, to identify key risks for the region, district or area, or to obtain preliminary guidance on the climate change-related risks associated with a particular function or service. Then, if warranted, do a full risk assessment. Follow accepted methods, which are usually already familiar to local authorities. Take into account the time context in evaluating risk. This means that a single risk assessment may involve repeated assessments for different time scales. Use the best information available for the local area. Where risks are found to be high or extreme, consider seeking additional information prior to decision-making.
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Figure 1. The risk assessment process. (Source: Ministry for the Environment, 2008)
•
Decisions can then be made on appropriate responses and plans can be developed for communication, consultation, monitoring and evaluation.
Integrating Climate Change Risk Assessment into Council Decisions Climate change is associated with uncertainty, therefore in decision-making some key considerations should be taken into account, including flexibility and responsiveness in seeking the best response options. The manual makes the following key points regarding integration of climate change Risk Assessment into council decisions (Ministry for the Environment, 2008, p. 83): •
•
Risk assessment procedures provide a method to evaluate the implications of elements of climate change, in terms of risks to communities and community assets. The risks can then be prioritized, and response options evaluated in terms of costs and benefits to assist a council in making a wide range of decisions. In applying risk assessment in local government decision-making, keep in mind also:
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◦
•
•
the range of established principles influencing local government decisions, which relate to environmental and financial responsibility and the needs of the future ◦ the growing recognition of climate change effects in planning case law ◦ uncertainty, which can lead to a range of responses – from ‘avoid if possible’ for issues that are long-term and have significant implications, to ‘manage’ for shorter-term issues with smaller-scale implications. It is essential to recognize that climate change effects are going to occur, over time, and that risks that are slight now will increase. Thus, responses can and should be planned in advance. Elements of climate change should be built into most council planning, depending on risk assessment and priorities. Monitoring undertaken by councils helps build up a picture of change over time, and contributes to more accurate future predictions.
Referring to the legal requirements, the manual summarizes several key principles for local government to keep in mind when dealing with climate change effects, including sustainability, provision for the needs of future generations, avoidance and mitigation of adverse effects, adoption of a cautious or precautionary approach, etc. It describes the relevance of climate change to local government management and planning responsibilities, and discusses existing use rights, resource consent decisions and building consents. It recommends long-term monitoring of climate change and its effects, as a basis for ongoing adaptation to change. It notes that case law that has developed to date covers the following issues of relevance to local authorities: • • • • •
recognizing the reality of climate change clarifying the respective roles of regional and territorial authorities indicating principles of hazard avoidance indicating time scales over which to consider effects clarifying the relationship between resource and building consents.
Finally, the manual provides a checklist for addressing climate change in plans developed under several legislation Acts.
DISCUSSION AND CONCLUSION An overview of four decision analysis frameworks has been presented in this chapter. They were selected among a number of tools intended to support government officials and, more generally, decision analysts and managers in the public and private sectors in analyzing climate change risks and hazards and formulating adaptation or Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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mitigation policies. The frameworks presented are the guidance manual for Local Government in New Zealand, the Guide for Business and Government published by the Australian Greenhouse Office, the UK Climate Impacts Programme and the United Nations Environment Programme. The frameworks selected serve the main purposes of this book, particularly to be of the widest applicability. Apart from providing general decision analysis approaches, each one of these frameworks is characterized by special features, which add to their value. All of them are addressed to a variety of clients and are applicable, either directly or with proper adjustment (if necessary), to varying circumstances and to different types of organizations and levels of decision-making as well as types of environmental challenges, and they take stakeholders into account. Most of them, to a bigger or lesser degree, include means to assess sensitivity, adaptive capacity and vulnerability, cover implementation along with theoretical issues and provide links to additional resources. The frameworks provide answers to questions of great practical significance such as which are the best practices for understanding and analysing the risks that are associated with climate change, how best to adapt to climate variability and extreme events, how to carry out effectively the decision-making and policy process, etc. The fact that such guidance frameworks have been issued by central authorities is indicative of the awareness of the risks posed by climate change and of the seriousness of these risks. Valuable insights may be gained by referring to different frameworks, as they complement each other. As put by Heinz (2007) there is no “perfect” guidebook or framework. However, each has its own unique focus areas and reflects the differing objectives, experiences and perspectives of those who produced it. The presentation of the overviews of the frameworks in this chapter has aimed at introducing these tools to decision analysts, including government officials and analysts in the private sector as well. For actual policy formulation, however, it is suggested that the tools are further studied in depth through the references given.
REFERENCES Australian Greenhouse Office. (2006). Climate Change Impacts & Risk Management - A Guide for Business and Government. Prepared for the Australian Greenhouse Office, Department of Environment and Heritage by Broadleaf Capital International Marsden Jacob Associates. Retrieved November 18, 2008, from http://www.climatechange.gov.au/impacts/publications/pubs/risk-management.pdf
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Australian Greenhouse Office. (2006a). Climate Change Risk and Vulnerability: Promoting an Efficient Adaptation Response in Australia. Prepared for the Australian Greenhouse Office, Department of Environment and Heritage by Broadleaf Capital International Marsden Jacob Associates. Retrieved November 18, 2008, from http:// www.climatechange.gov.au/impacts/publications/pubs/risk-vulnerability.pdf Burton, I., Kates, R. W., & White, G. F. (1993). The Environment as Hazard (2nd ed.). New York: Guilford Press. Heinz. (2007). A Survey of Climate Change Adaptation Planning. Washington, DC: The H. John Heinz III Center for Science, Economics and the Environment. Retrieved November 18, 2008, from http://heinzcenter.org/publications/PDF/Adaptation_Report_October_10_2007.pdf Henderson-Sellers, A. (1996). Can we integrate climatic modelling and assessment? Environmental Modeling and Assessment, 1, 59–70. doi:10.1007/BF01874847 Houghton, J. T., Meira Filho, L. G., Callander, B. A., Harris, N., Kattenberg, A., & Maskell, K. (Eds.). (1996). Climate Change 1995: The Science of Climate Change. Contribution of Working Group I to the Second Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK: Cambridge University Press. IPCC. (1990). Climate Change: The IPCC Scientific Assessment (Houghton, J. T., Jenkins, G. J., & Ephraums, J. J., Eds.). Cambridge, UK: Cambridge University Press. IPCC. (2007). Climate change 2007: Synthesis Report. IPCC Fourth Assessment Report (AR4). Intergovernmental Panel on Climate Change. Retrieved February 13, 2009, from http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synthesis_report.htm Ministry for the Environment. (2008). Climate Change Effects and Impacts Assessment: A Guidance Manual for Local Government in New Zealand (2nd Ed.). (B. Mullan, D. Wratt, S. Dean, M. Hollis, S. Allan, T. Williams & G. Kenny, Eds.). Wellington: Ministry for the Environment. Retrieved November 18, 2009, from http://www.mfe. govt.nz/publications/climate/climate-change-effect-impacts-assessments-may08/ climate-change-effect-impacts-assessment-may08.pdf Smith, J. B., & Tirpak, D. (Eds.). (1989). The Potential Effects of Global Climate Change on the United States. EPA-230-05-89-050. Washington, DC: US Environmental Protection Agency.
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The New Zealand Climate Change Office. (2004). Coastal Hazards and Climate Change: A Guidance Manual for Local Government in New Zealand. New Zealand Climate Change Office. Retrieved November 18, 2008, from http://www.mfe.govt. nz/publications/climate/coastal-hazards-may04/coastal-hazards-may04.pdf UNEP. (1998). Handbook on Methods for Climate Change Impact Assessment and Adaptation Strategies, Version 2.0. (J. F. Feenstra, I. Burton, J. B. Smith & R. S. J. Tol, Eds.). Vrije Universiteit Amsterdam, Institute for Environmental Studies, and United Nations Environment Programme. Retrieved November 18, 2008, from http://dare.ubvu.vu.nl/bitstream/1871/10440/1/f1.pdf Viner, D., & Hulme, M. (1992). Climate Change Scenarios For Impact Studies in the UK. Climatic Research Unit. Norwich, UK: University of East Anglia. Warrick, R. A., Kenny, G. J., & Harman, J. J. (Eds.). (2001). The Effects of Climate Change and Variation in New Zealand: An assessment using the CLIMPACTS system. Hamilton: International Global Change Institute (IGCI). University of Waikato. Willows, R. I., & Connell, R. K. (Eds.). (2003). Climate adaptation: Risk, uncertainty and decision-making. UKCIP Technical Report. UKCIP, Oxford. Retrieved November 18, 2009, from http://www.ukcip.org.uk/images/stories/Pub_pdfs/Risk.pdf
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309
Epilogue
Implications of climate change for the society and economy, particularly at the company and supply chain levels, is the topic covered in this book. Issues addressed include: the contribution of specific operations along the supply chain (e.g. production, transportation, etc.) to global warming; the impacts of climate change on such operations; climate adaptation policies in the developed and developing countries; companies’ position in reference to climate change and the range of incentives or barriers that may encourage or prevent climate adaptation; climate change mitigation policies and instruments; the problem of stabilization of greenhouse gas concentrations; business responses to climate change, including some well-known paradigms and collective initiatives; approaches to coping with risk and uncertainty in a climate change context; and relevant decision analysis frameworks. Throughout the book, company examples as well as examples of sectors that either move ahead or lag behind as far as adopting policies to fight climate change is concerned, and domains of new opportunities among sectors emerging from climate change, have been presented. In order to substantiate the analysis and the main arguments developed in the book, many invaluable sources of reference have been used and relevant issues have been presented, starting from the first chapter, where some of the most important features of today’s enterprise, namely, extended enterprise and corporate social responsibility have been outlined. In addition, new risks and challenges that arise from the environment of the 21st century enterprise have been presented. Furthermore, the basic facts regarding global warming have been summarized, based almost exclusively on the latest scientific findings, as reported in February 2007 by the Intergovernmental Panel on Climate Change’s Fourth Assessment Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
310 Epilogue
Report (particularly the Report of the Working Group I on the Physical Science Basis of Climate Change). Finally, the global impacts of climate change have been outlined based on scientific findings, as summarized in the largest, most widely known and discussed and most influential of the reports assessing the impacts of climate change on economy and society so far, namely, the Stern Review on the Economics of Climate Change. From the analysis presented in the previous chapters it is evident that climate change is not anymore a matter of controversy and conflict regarding the issues of whether it is actually taking place or not, or the roots of global warming and its impacts. It is almost globally acknowledged, indeed, that the climate change crisis is real. Climate change, caused by global warming, which is the result of burning fossil fuels and change of land use, i.e. it is rooted in particular human activities, is increasing at an annual rate estimated to be about 2% in the period 2002-2025, with double that figure taking place in China (EIA, 2005). It is also acknowledged that the economic and social implications of climate change are already extremely serious and the anticipated ones will be even more so. In a world where uncertainty and risks are increasing, climate change has become a major contributor, if not the biggest one, to instability. What is still a matter of controversy and conflict is the kind and size of action needed, as well as the share in the common efforts and costs to be undertaken by governments and leaders around the world. In the mid of controversy, apart from the share of responsibilities, there are the particular strategies for reducing greenhouse gas emissions to be adopted and reversing climate change, including control mechanisms to be enacted and alternative fuel technologies to be developed and used. The above issues emerged very clearly and intensely during the Copenhagen climate change summit that took place from December 7 to 18, 2009, under the official name COP15, as it was the last of 15 Conferences of the Parties under the United Nations Framework Convention on Climate Change (UNFCCC), which was signed by 192 countries. As the first phase of Kyoto expires in 2012 the world set itself a deadline to agree on a successor agreement. That deadline expired in December, 2009, and during that time “the highest profile, best attended, most widely publicized, eagerly awaited and closely scrutinized UN climate talks so far” (The Guardian, 2009a) took place in Copenhagen. In a relevant editorial that appeared on the eve of the summit (The Guardian, 2009b), the problems underlying the summit (and actually any effort that might lead to a global treaty for fighting climate change) were classified into three broad categories: “First is money. On a simple cost-benefit analysis, the best value lies in substantial and early action, as Sir Nicholas Stern's landmark report in 2006 found. The price of dealing with natural disasters and population movements triggered by global warming in the future is higher than the price of cutting emissions today”..” Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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As pointed out in the editorial, “at Copenhagen the question of cost cuts across delicate diplomatic lines. It is broadly recognized that countries that have already industrialized, and so already pumped billions of tons of carbon into the atmosphere, ought to subsidize the transition to greener energy elsewhere. But there is no agreement on how big the subsidy should be or how the transfer will be managed. The idea of western taxpayers, for example, helping the Chinese to develop competitive new green technology is not an easy sell in the US Senate”..” Then the second problem, politics, enters the scene: “A global treaty to limit emissions would require a global enforcement regime to ensure its provisions were met. That means some submission of national governments to international authorities, possibly with inspections and sanctions of some kind. The US has always been virulently opposed to any such implied subordination. But without US participation a climate deal is practically useless”..” Denial of the science is, according to the above analysis, the third problem, which is rooted in the prospect of a global climate governance regime that would enforce a global treaty, establish the inspection mechanisms required and impose sanctions. This prospect, according to the editorial, would fire the growing antienvironmentalism movement, which, invoking manipulation of data, flawed or exaggerated evidence and intent to suppress dissenting opinion on the true nature and extent of climate change, may lead to “new excesses of paranoia”..” At the core of this book lies the relationship between company and supply chains on the one hand and climate change on the other. At the company and supply chains level, there is still much ground to be covered regarding expansion of corporate involvement in developing and implementing strategies to fight climate change. At present, the role of companies along supply chains, although very important as they are among the important contributors to global warming, is generally lagging quite behind what is actually needed in view of current and future threats posed by climate change. This lag, apart from causing further deterioration of climate, is detrimental to the companies’ long term interests. Companies with significant supply chain operations are advised by White (2007) that they must be more aware of how their supply chain management (SCM) activities affect the environment, how sustainable the activities are and how sustainable and profitable supply chain practices may be created by emerging SCM technology. Key findings from his research indicate that most SCM users are not explicitly modelling the effects of their supply chain on their environment. They also indicate that most SCM technology is not yet able to explicitly consider environmental or resource consumption factors that are independent of profitability concerns or model the right business decisions to support this need. And, finally, that SCM technology is emerging and being adapted to help model environmental implications, so that organizations understand their impact on the environment and how to reduce it. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
312 Epilogue
While making specific reference to application vendors and technologies, White (2007) makes several recommendations to enterprises in view of the climate change threat and their endeavour for going green that address planning, awareness, execution and negotiation issues. These include: • •
•
•
•
Building a holistic plan for going green, made up of incremental steps. Identifying aspects of the supply chain that contribute most significantly or are affected most by green conditions and putting in place a plan to gather the necessary data to model the environmental considerations in the company’s planning systems. Developing a plan to deepen the company’s analytical skills and database with this data to enrich the optimization capability. Putting in place a plan to get operational data and new benchmarking data to support green optimization strategies. Building an analytics and business intelligence strategy that enables the enterprise to capture information about green initiatives and support customer reporting requirements. Engaging with the company’s vendor (supply chain planning, transportation management, third-party logistics, strategic network design) or IT organization to determine if the company is applying optimization to the level of granularity needed to model environmental factors, such as carbon contribution. Developing a road map and engaging with partners for multi-enterprise planning, execution and coordination so that joint supply chain decisions about resource consumption can be built across trading partner boundaries.
Technology, however, is not met with such high expectations as those inferred from the above. In fact, it may not be the real issue. As Kingsnorth (2009a) puts it, “the challenge posed by climate change is not really about technology. It is not even about carbon. It is about a society that has systematically hewed its inhabitants away from the natural world, and turned that world into a resource. It is about a society that imagines it operates in a bubble; that it can keep growing in a finite world, forever”..” Citing Kingsnorth (2009b) again, “we have pushed back the forests, denuded the oceans, exhausted the soil, tipped other species into extinction, expanded our population to the point where we can barely feed ourselves, and changed the chemical composition of the atmosphere. There is no quick fix for this, and possibly no fix at all. Our systems are not designed for it. An economy predicated on constant growth cannot be the engine of a change that urgently demands less of it. Democracies predicated on giving their consumer citizens what they want are unable to tell them what they cannot have. And the psychology of a culture that reacts in horror to any pothole on the road to utopia is not well placed to take a different path”..” Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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Thus, he concludes that “Copenhagen won't alter the ecological reality. There is no quick fix or sustainable growth, only painful decline ahead”..” It is very likely that climate will deteriorate at a much faster rate and in much more catastrophic ways than we have so far thought. This may well be the result of not having taken appropriate action when it was still time to do it, and of yet unknown or not well understood pathways taken by physical cause-effect relations and feedbacks. The Stockholm Network (http://www.stockholm-network. org/Conferences-and-Programmes/Energy-and-Environment/carbonscenarios), a leading pan-European think tank and market oriented network, has produced a set of three Carbon Scenarios, known as Kyoto Plus, Agree & Ignore and Step Change, which describe three plausible futures resulting from three different approaches to climate policy at the international level. In these scenarios, the various climatic, economic and social costs and consequences of international policy are examined. What is very worrying, and even frightening, is that none of the scenarios provides a policy, which could achieve climate “success” as defined by the UK, EU and UN. Such a “success” would be a greater than 90% chance of no more than 2°C warming above pre-industrial levels. Only one of the scenarios, Step Change, even meets the weaker definition of success of a greater than 90% chance of no more than 3°C warming above pre-industrial levels. This weaker definition is one that some in the UK and EU are now considering adopting in recognition of the fact that the 2°C degree goal has already been missed and assumes innovative and efficient policies to contain the greatest damage. The Step Change scenario looks at the possibility that policy may take a course radically different than the other two scenarios in response to a step change in concern about climate change, leading to the adoption of an entirely new policy framework, namely, a global production cap. It shows the least climate change, with global average temperature having a greater than 90% chance of rising by no more than 2.85°C above pre-industrial levels by 2100. Initial costs in this scenario would be higher than in the other two ones and the global economy would see the highest overall long-term growth. This is due to the efficiency of the scheme, showing that a market oriented system that focuses on the efficient allocation of carbon rather than a heterogeneous mix of specific sectoral policies offers the best chance of both avoiding severe climate change and maintaining economic growth while cutting emissions. It should be noticed that, according to the other two scenarios, the forecasts are much worse: The Kyoto Plus scenario envisages a gradual process of co-operation, leading to a global cap on CO2 emissions by 2012, with global average temperature having a greater than 90% chance of rising by no more than 3.15°C above pre-industrial levels by 2100, and the global economy continuing to grow, having successfully absorbed the costs. The much worst Agree & Ignore scenario envisages global average temperature that will have a greater than 90% chance of rising Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
314 Epilogue
by no more than 4.8°C above pre-industrial levels by 2100, leading to a significant likelihood of substantial climate change to 2100 onwards. Moreover, while the initial costs of the global cap are not borne, regional schemes are less efficient. According to this scenario, additional costs will come from intensifying regional economic competition, including the use of carbon tariffs, and the very sizeable direct economic costs of a changing climate. Concerns about the economy in the short term will lead to short-sighted decisions that substantially constrain growth in the long term and lead to serious direct human costs of climate change. No room for optimism is thus allowed by the Carbon Scenarios of the Stockholm Network. What is even more frightening with the above scenarios is the case of the “chance of up to 10%”: in all three scenarios, even in the most optimistic one, there is room left for global average temperature having an up to 10% chance of temperature rising by more than what is envisaged by each scenario. The consequences in this case would be much graver. Summarizing the above, in view of the unprecedented challenges posed to mankind by current global warming, complicated as they are by other socio-economic problems of the planet, a new world paradigm is urgently needed for a sustainable planet, as noted in the Preface. This new paradigm should be based on a different pattern of social organization, shaped by different values that would entail, among others, different consumption and life styles. This would assume the consent of individuals, but institutional involvement would also be a sine qua non condition. No such paradigm, universally accepted, is as yet visible in the horizon, although promising islets, where individuals and groups of people adopt an environmentally friendly, anti-global warming approach, along with initiatives at company and institutional levels, can be found around the world. The most optimistic expectations from nearly all steps taken until now may be no more than avoiding a total collapse in the short term future. While GHG emissions continue to grow, not only from countries like USA and developing countries, including China and India, but also from Kyoto protocol signatories, all programs under way aim mostly at emission reduction. Characteristically, in the USA’s transportation sector, the most polluting among all sectors in the country, almost all programs’ modest goal has been to stem the tide of growing GHG emissions and not to transform the transport and energy systems or to alter travel behavior and land use development (Sperling & Cannon, 2007). Until recently, USA has been the world’s largest GHG emitter, accounting for about 27% of the world’s CO2 emissions. With its enormous population and breathtaking pace of economic development, China has already surpassed USA as the largest emitter of GHGs (NYTimes, 2009).
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The ultimate conclusion may be what has already been noticed: a radical departure from the current predominating values and models of life, towards sustainability, seems to be imperative for the salvation of human culture and the planet. Current modes of energy and manufacturing production, consumption, transportation, land use and infrastructure and domestic building have to be drastically changed. Undoubtedly, concerted and decisive actions by the general public (individuals and their organizations), combined with initiatives by enlightened world leaders, may help restrict the severity of some of the effects of climate change and even slow the pace of climate deterioration. However, the specific answer to the question “how, in exactly what terms, by means of which breakthrough policies the radical, dramatic shift that is needed may take place and be endorsed by human society?” still remains unknown.
REFERENCES EIA. (2005). U.S. Energy Information Administration. Emissions of Greenhouse Gases in the United States, 2004. Washington, D.C.: Author. Kingsnorth, P. (2009a, July 31). A windfarm is not the answer. The Guardian, 31 July 2009.. Retrieved on December 3, 2009, from http://www.guardian.co.uk/commentisfree/cif-green/2009/jul/31/wind-farm-technology-green-environmentalists Kingsnorth, P. (2009b, November 24). A climate deal is like trying to halt the rains in Cumbria. The Guardian, 24 November 2009.. Retrieved on December 3, 2009, from http://www.guardian.co.uk/commentisfree/cif-green/2009/nov/24/climatedeal-halting-rain-cumbria NYTimes,. (2009). China Joins U.S. in Pledge of Hard Targets on Emissions. NThe New York Times. Retrieved on December 1, 2009, from http://www.nytimes. com/2009/11/27/science/earth/27climate.html?_r=1&th&emc=th Sperling, D., & Cannon, J.S. (2007). Introduction and Overview. In Sperling, D. Sperling., & J. S. Cannon, J.S. (eEds.), Driving Climate Change, Cutting Carbon from Transportation., London: Academic Press, London. UK. The Guardian. (2009a). Copenhagen climate talks: Time to change, no time to waste. Retrieved on December 1, 2009, from http://www.guardian.co.uk/environment/2009/nov/10/copenhagen-climate-change-summit-2c
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The Guardian. (2009b). The truth about climate: Copenhagen isn't enough. Retrieved on December 7, 2009, from http://www.guardian.co.uk/commentisfree/2009/dec/06/ editorial-copenhagen-climate-change White, A. (2007). A New Wave of SCM Innovation Must Address Climate Change Concerns. Gartner, ID Number: G00149710. Retrieved March 25, 2009, from http:// www.carbon-view.com/pdf/Gartner%20New%20Wave%20of%20SCM%20Innovation.pdf
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Appendix
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318 Appendix
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*
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320 Appendix
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322 Appendix
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324 Appendix
Table 8 GHG produced by the Water Transportation sector* (releases in metric tones of CO2 equivalent per $1 million sales) GWP CO2 CH4 N2O CFCs MTCO2e MTCO2e MTCO2e MTCO2e MTCO2e Total for all sectors 1430 1360 47.3 18.9 4.58 Sector
483000
Water transportation
1050
1030
4.10
12.3
0
Scenic and sightseeing 48A000 transportation and support activities for transportation
106.0
106.0
0
0
0
221100
Power generation and supply
102.0
101.0
0
0
1.23
211000
Oil and gas extraction
18.2
3.06
15.2
0
0
Waste management 562000 and remediation 18.0 services
2.84
15.1
0.022
0
324110 Petroleum refineries 16.1
16.0
0.089
0
0
484000
Truck transportation
12.7
12.5
0.019
0.175
0
486000
Pipeline transportation
7.68
3.69
3.98
0
0
331111 Iron and steel mills 7.55
7.55
0
0
0
481000 Air transportation
7.36
0.009
0.079
0
7.45
* The Water Transportation sector is comprised of the following NAICS subsectors: Deep Sea, Coastal, and Great Lakes Water Transportation, Deep Sea Freight Transportation, Deep Sea Passenger Transportation, Coastal and Great Lakes Freight Transportation, Coastal and Great Lakes Passenger Transportation, Inland Water Transportation, Inland Water Freight Transportation, Inland Water Passenger Transportation.
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326 Appendix
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330 Appendix
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332 About the Author
About the Author
Costas P. Pappis is Professor in Operations Management at the University of Piraeus, Department of Industrial Management and Technology. He has held posts in the National Bank of Greece and the Ministry of National Economy (Director of Offsets Office) and has worked as a consultant/research analyst. He has been Associate Professor in the Mechanical Engineering Dept. of the University of Patras and Visiting Professor at Politecnico di Torino. He has been Vice President of the European Association of Operational Research Societies (EURO), President of the Hellenic Operational Research Society and Chairman of the Jury for the EURO Award for the Best Applied Operational Research Paper. He has published in, among others, IEEE Systems, Man and Cybernetics, European Journal of Operational Research, Journal of the Operational Research Society, Fuzzy Sets and Systems, Intern. Journal of Production Economics, Ecological Indicators, Journal of Cleaner Production, Resources, Conservation and Recycling, etc.
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Index 333
Index A acidification 179 ADAM project 138 adaptation 249, 252, 253, 254, 255, 256, 258, 262, 264, 265, 270 agile manufacturing (AM) 102, 103 agricultural 94 aluminum production 3 American Legislative Exchange Council (ALEC) 191, 236 American Petroleum Institute 192, 236 annular modes 45 anthropogenic origin 2 assigned emissions credits (AAUs) 165, 169 Association des Enterprises pour la Réduction des gaz à Effet de Serre (AERES) 220 Atmosphere-Ocean General Circulation Models (AOGCMs) 52, 53 atmospheric concentration 157 Australian Greenhouse Office 272, 273, 289, 290, 291, 292, 294, 295, 297, 306, 307
B balance across all sources (A1B) 53, 56, 57
Biogeochemistry 31, 50, 63 brand and reputational risks 144 Brundtland Commission 22 Business Leaders Initiative on Climate Change (BLICC) 219
C CAFE standards 175 California Climate Action Registry (CCAR) 219 carbon capture 155, 183 carbon dioxide (CO2) 33, 34, 38, 56, 58, 59, 62 Carbon Disclosure Project 104, 106, 243 Carbon Disclosure Project (CDP) 191, 193, 194, 195, 196, 197, 198, 200, 202, 203, 204, 205, 206, 207, 208, 209, 234, 235, 238 carbon fertilization 71, 73 carbon fixation 71 carbon-intensive coal 155 carbon technologies 155, 156, 158, 170, 182 CDP6 104, 105, 106, 113 cement manufacturing 3 Centre for the Study of Financial Innovation (CSFI) 18, 19, 27 CERES v, xiii, 209
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334 Index
CERES Report v, xiii Chicago Climate Exchange (CCX) 220 China 2, 5, 26, 28 circulation models 277, 278 Cisco 202, 208 Clean Development Mechanism (CDM) 167, 168, 186, 189, 197 climate adaptation 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 146, 147, 148, 150 Climate Change 2007 36, 62, 63, 64, 65 Climate Change Science 31 Climate Disclosure Leadership Index (CDLI) 195, 196, 198, 199, 200, 201, 202, 203, 204, 205 climate policy goals 242 climate projections 250, 264 climate sensitivity 250, 268, 296 Climate System 31, 63 climate variability 271, 283, 285, 299, 306 coastal protection measures 294 communication technology 5, 7, 23 Competitive Enterprise Institute (CEI) 191, 236 competitiveness risks 144 Corporate Average Fuel Economy (CAFE) 236 Corporate Social Responsibility (CSR) 4, 5, 9, 10, 11, 12, 13, 14, 15, 16, 21, 23, 24, 25, 29 culture 275 customer relationship management (CRM) 102
D data flows 98 Department for Environment, Food and Rural Affairs (DEFRA) 76, 90 Department of the Environment, Transport and the Regions (DETR) 111, 126 Designated Operational Entity (DOE) 168 developed countries 68, 75, 76, 77, 85, 87, 127, 132, 133, 134, 138, 140, 144, 154, 163, 165, 182 developing countries 68, 75, 76, 89, 90,
127, 154, 155, 156, 163, 167, 168, 182
E Earth’s climate 31, 32, 34 Earth Summit 160 Earth System Models of Intermediate Complexity (EMICs) 53 ecodesign 107 economic development 155, 182 economic growth 155, 182, 247 economic impacts 127 Economics of Climate Change 66, 67, 68, 69, 88, 91, 92 economic structure 75 economy 1, 4, 5, 12, 18, 21, 22, 67, 68, 74, 84, 88, 94, 103, 104, 106, 108, 123, 125 Ecosystems 72 efficient consumer response (ECR) 102 EIOLCA method 108 electricity generation 94, 121 electrolysis of water 175 El Niño 41, 44, 56, 72, 82, 300 El Niño-Southern Oscillation (ENSO) 44, 45, 56 Emission Reduction Units (ERUs) 169 emissions growth 154, 155, 156, 182 Emission Trading System (ETS) 196, 220 empirical studies 275 end-of-life (EOL) 99 energy-intensive industries 155, 182 energy markets 174 enterprise 1, 3, 4, 5, 6, 7, 8, 9, 11, 15, 17, 22, 23, 24, 25, 28 enterprise social responsibility 127 environment 1, 3, 4, 5, 6, 7, 9, 10, 13, 15, 17, 20, 21, 22, 25 environmental changes 275 Environmental Protection Agency (EPA) 217, 229, 237 EU Emissions Trading Scheme (EU ETS) 163, 166, 242 European climate policy 138, 148 European Commission’s Green Paper 9 European Community 99
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Index 335
European Economic and Social Committee 12 European Strategy for Sustainable Development 12 European Working Group on Reverse Logistics 98 extended enterprise 4, 28, 127
F ferroalloy manufacturing 3 forestry products 94 fossil fuels 2, 3, 31, 33, 34, 38, 155, 156, 172, 174, 178, 179, 182 fossil intensive (A1FI) 53, 56 Fourth Assessment Report 244, 246, 248, 249, 252, 263, 264, 267, 268 FTSE Global Equity Index Series 193, 203
G G8 Climate Change Roundtable 165 GDP growth 154, 182 genetically modified organisms (GMOs) 180 geographic boundaries 274, 292 geographic information systems 279 German Technical Co-operation Agency 142 GHG concentrations 153, 156, 158, 159, 167, 176 GHG emissions 2, 4, 155, 158, 160, 162, 165, 168, 171, 172, 175, 176, 184, 185, 247, 250 Global 500 135, 194, 196, 198, 202, 203, 204, 205, 206, 207, 234, 238 global climate 129 Global Climate Coalition (GCC) 191 global demographic 278 global emissions 153, 154, 156, 157, 158, 182 Global Framework for Climate Risk Disclosure 243, 267 globalization 3, 5, 7, 12, 20, 23 globalized world 127 global per capita consumption 80 Global Reporting Initiative’s (GRI) 14, 15,
25, 243 global warming 1, 2, 3, 30, 31, 33, 43, 58, 59, 60, 61, 62, 95, 104, 106, 107, 108, 110, 111, 114, 116, 117, 118, 119, 121, 122, 123, 124, 153, 154, 158, 159, 169, 172, 177, 182, 183, 241, 242, 248, 249, 250, 253, 260, 263, 265 Global Warming Potential (GWP) 108, 110, 114, 116, 117, 118, 160 Greenhouse Effect 2, 32, 33, 34, 36, 39, 44 greenhouse gas emissions 191, 193, 207, 209, 217, 219, 232, 233, 234, 238, 242, 243 greenhouse gases (GHGs) 2, 33, 34, 35, 37, 38, 39, 51, 54, 57, 58, 59, 60, 61, 62, 153, 154, 156, 159, 160, 161, 163, 164, 165, 173, 176, 182, 184 Greenhouse Gas Protocol 194, 218, 219, 235, 239 gross domestic product (GDP) 68, 70, 75, 77, 79, 80, 81, 82, 83, 84
H halocarbons 33 human-induced climate change 35 human societies 1, 30, 130, 131, 148, 242 hydrocarbons 155, 175 hydrofluorocarbons (HFCs) 39, 222 hydrological variability 75
I ice sheet 250 impacts of biofuels 178, 180 Industrial Revolution 31, 154, 182 industrial sector 2 Information Technology 96, 119, 124 infrared radiation 32, 34, 38 infrastructure 94, 97, 104, 112, 113, 115, 116, 121, 122, 123 Institute for Environmental Studies 272, 273, 308 Institutional Investors Group on Climate Change (IIGCC) 218, 219, 235,
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336 Index
239, 242, 243, 267 Integrated Assessment Model, 80 integrated systems models 275 Intergovernmental Panel on Climate Change (IPCC) 31, 32, 33, 34, 35, 36, 37, 38, 43, 45, 51, 52, 53, 63, 66, 67, 70, 88, 90, 91 International Organization for Standardization (ISO) 14, 15, 22 International Petroleum Industry Environmental Conservation Association (IPIECA) 220 Investor Network on Climate Risk (INCR) 243 IPCC Workshop on Uncertainty and Risk 248 iron 3 irrigation systems 294 ISO 9000 series 22
J Joint Implementation and the Clean Development Mechanism 183 Joint Implementation (JI) 197 Joseph Stiglitz 69 Just In Time (JIT) 102
K Kaizen 22 Kenneth Arrow 69 Kyoto Protocol 106, 138, 154, 159, 160, 162, 163, 164, 165, 166, 167, 168, 169, 183, 187, 188, 189, 212, 216 Kyoto Protocol gases 39
L lean manufacturing (LM) 102, 103 legal (litigation) risks 144 legislation 275, 305 Life Cycle Assessment (LCA) 106, 107, 108, 122, 124, 180 lime manufacturing 3 low-carbon technology 170
M Mandatory Financial Reports 243 marine ecosystems 71, 73 market failures 251 methane (CH4) 33, 38, 39, 58, 59 mitigation 128, 129, 131, 135, 136, 138, 140, 147, 153, 158, 159, 163, 169, 176, 180, 181, 182, 183, 184, 185, 186, 249, 259, 261, 264, 265 Mitigation policies 68
N National Allocation Plan (NAP) 196 National Association of Manufacturers 192, 237 national economy 161 natural environment 4 natural phenomena 94 natural resources 94, 120 New Zealand 272, 273, 298, 299, 300, 301, 302, 303, 306, 307, 308 New Zealand Standard for Risk Management 258 nitrous oxide (N2O) 33, 59 non-fossil energy sources (A1T) 53, 56 non-marginal economic effects 251, 264 nonrenewable sources 178 Northern Hemisphere (NH) 46, 48
O ocean acidification 70, 71 oil shales 155 operations and maintenance (O&M) 94 operations management (OM) 95, 102 Organization for Economic Co-operation and Development (OECD) 36, 132, 142, 148, 150 ozone layer depletion 179
P Pacific decadal variability 41, 44 perfluorocarbons 36, 39 PEST analysis 4 PESTEL 4 photosynthesis rates 71
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Index 337
physical flows 98 physical infrastructure 129 physically-based empirical relationships 277 physical risks 144 policy (regulatory) risks 144 political instability 94 political structures 142 post-Kyoto international regime 242 precautionary approach 305 PRECIS 76, 91 process modelling (ARIS) 8 proliferation of multinational enterprises 5 pulp mills 3
Q QFD 22 Quality Circles 22
R radiating energy 32 radiation 2 Radiative Forcing (RF) 36, 37, 38, 39, 51, 54, 58, 59 Research, Development and Demonstration (RD&D) 159 reservoir capacity 294 resilient housing 294 Reverse Logistics 98, 99, 100, 117, 125 REVLOG 99 rising sea levels 93 risks 94, 95, 104, 105, 106, 112, 113, 114, 115, 116, 121, 122, 123, 124, 241, 243, 244, 245, 247, 250, 251, 252, 254, 255, 256, 257, 258, 259, 260, 261, 262, 264, 265, 266
S SCOR model 102 sea level equivalent (SLE) 47, 48 securitization 260, 266 short wavelengths 32 Simple Climate Models (SCMs) 53 Sir Nikolas Stern 68 Six Sigma 22 SLEPT 4
small and medium enterprises (SMEs) 231, 233 social impacts 127 social instability 94 society 1, 9, 13, 15, 16, 18, 67, 68 socio-economic changes 131 socio-economic parameters 276 socio-economic scenarios 275, 276 spectrum 32, 33 steel mills 3 STEEPLE 4 Stern Review 152, 153, 154, 156, 169, 170, 171, 172, 173, 174, 175, 180, 181, 182, 184, 185, 188, 247, 249, 250, 251, 252, 263, 264, 269 storm-water systems 294 sulphur hexafluoride (SF6) 33, 39 supply chain 94, 95, 96, 97, 98, 100, 101, 102, 103, 104, 106, 107, 108, 110, 111, 114, 116, 117, 118, 119, 121, 122, 123, 124, 125 supply chain management (SCM) 96, 97, 100, 101, 102, 103, 126, 127 sustainability 279, 305 synfuels 155
T technology 275 The Society of Environmental Toxicology and Chemistry (SETAC) 107 Total Quality Management (TQM) 22, 102 trade explosion 5, 23
U UK Climate Impacts Programme (UKCIP) 134, 135, 136, 137, 144, 149, 151 UK Emissions Trading Scheme (UK ETS) 220 UN Framework Convention on Climate Change (UNFCCC) 138 United Nations Conference on Environment and Development (UNCED) 160 United Nations Environment Programme (UNEP) 35, 241, 253, 255, 264, 270
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338 Index
United Nations Framework Convention on Climate Change (UNFCCC) 35, 36, 53, 160, 167, 169, 188 United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (UN ISAR) 15, 29 United States 2, 3, 5, 28
V vector-borne diseases 71, 73 very low carbon transport 175 volume of emissions 247
W
wildlife corridors 294 World Business Council for Sustainable Development (WBCSD) 218, 220 World Climate Impact Assessment and Response Strategies Programme (WCIRP) 273 world government 191 World Meteorological Organization (WMO) 35 World Resources Institute (WRI) 218 World Wildlife Fund (WWF) 219, 228
Z Zero Defect Program 22
warming effect of GHGs 250 water cycle 93
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