Beyond the Carbon Footprint
Attaining competitive advantage in a carbon-constrained world takes flexible cost management
and long-term planning.
Jesco d’Alquen | tradeslot Pty Ltd
T he carbon economy is creating an opportunity
for companies to create competitive advantage.
It’s also creating a challenge for analysts to figure
out which companies are doing well and which have
merely added a cost factor to their operations. A
carbon-constrained world is on its way, regardless of
who will move into the White House in November1.
As is the case with all developments that imply major
change, coming to terms with the new economy will
take time and effort.
In the past, companies and politicians have ignored
carbon as an environmental and economic issue. Today,
while most businesses take serious note, some have
set their efforts on lobbying policy makers to grant
exemptions from the need to price carbon emissions.
On the upward slope of the Carbon Adoption Curve
sits the recognition that all businesses are affected
in one way or another—and that we are probably
Carbon Adoption Curve
“The carbon
economy will
not affect our
company”
Industry lobbying “This will cost
to avert impact jobs - if not the
(grandfathering or future of the
exemption) company”
Jesco d’Alquen is CEO of tradeslot, a technology company in Melbourne, Australia that creates optimization and allocation
platforms for carbon and other commodities in cooperation with a network of international thought leaders in strategy, market
design, and auction theory. The company has won a series of U.S. and Australian patents.
not all doomed. At that stage, a lot of companies
ask what they need to do, essentially trying to
understand what the minimum requirements are to
be compliant. Those answers are not trivial. In fact,
such baseline and accounting questions will keep
many executives awake and consultants in business.
But, perhaps more importantly, companies should ask
a different question: how can they turn this challenge
into an opportunity? They wouldn’t be alone. Leaders
in the carbon economy have found a way to do well
by carving out a competitive advantage.
Smart companies quickly get the “bean counting”
aspect done and out of the way. To them, carbon
is not another compliance report but an additional
dimension in which to make the right investment
decisions, drive innovative thinking, and connect with
the customer. Of course, efficient and auditable
accounting is important as a first step.
“How can we
create competetive
advantage in the
carbon economy”
“What do I have to do
(to be compliant)”
“All companies in
my industry are in
the same boat...”
Source: tradeslot pty ltd, (adapted from Kubler-Ross)
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Smart companies know what their carbon footprint is,
but they really care about how they are doing relative
to their competitors 2. As we move into market-based
carbon regimes, the footprint discussion expands
from being primarily a matter of social responsibility
and reputation to one of cost management and
strategic planning. To beat the guy next door, the first
and obvious lever is to invest in smart abatement
projects that reduce emissions. Ultimately, the carbon
economy aims to achieve a net reduction of CO2 in
the atmosphere through market pressure.
But thanks to the nature of CO2, it is actually
irrelevant where emissions are reduced. That brings
businesses back into well-known territory: make-
or-buy decisions. The Kyoto Protocol created a
thriving market between the developing world and
industrialized nations, allowing certified reduction
credits to be traded freely3. This led to a natural
benchmark for any activity a company might consider
internally to reduce its carbon footprint.
Cost differentials in markets for credits and permits
are no small matter and as important as the make-
or-buy decisions above. Buying an offset for a ton
of carbon can set a company back $10 to $404. If a
company is a large emitter of CO2 or a large user of
energy, that spread will be noticeable on the balance
sheet once a mandatory carbon regime kicks in.
The big variable here is the price of carbon, not just
the amount emitted, which is why counting tons of
carbon is just the beginning5.
With a range of potential investment and offset
options, the internal cost of carbon (or Weighted
Average Cost of Carbon, WAC CO2) varies from
92 www.awarenessintoaction.com
company to company and creates a competitive
indicator2. How much per ton of CO2 does it cost
the company to reduce its emissions? How much
per ton is the company spending on offsets? These
indicators illustrate whether a company is making
smart abatement decisions against a backdrop of
alternatives. They show whether the management
team is market-savvy and understands how to
balance risk and financial outcome in the evolving
offset market.
Once a company understands its current and future
position, it is able to make better investment decisions.
For example, take an abatement project that doesn’t
meet the hurdle rates and is therefore not viable
today. But forecasting the company-specific cost of
carbon could show a project becomes doable when
kicked off after 2010. Conversely, an investment
proposal may show a positive return today, but will
the planned facility still hit the required return on
investment after the forecast weighted average cost
of carbon is built in?
Analysts are getting more and more interested in
understanding the efficiency of companies dealing
with their carbon liabilities6. Investors are guaranteed
to penalize companies that show a high weighted
average cost of carbon, as poor carbon decisions
today will take a big bite out of profits and share prices
tomorrow7. Conversely, mergers and acquisitions
could create additional value by allocating assets to
companies with a preferential internal cost of carbon.
With this in mind, it becomes apparent why a
shadow price for carbon is not a substitute for
understanding the company’s WAC CO2: the
former is largely based on an educated guess about
the market, while the latter is a true reflection of
the company’s capabilities to seek alternatives and
beat the market.
The carbon economy is not asking businesses to
forget what they know about rational decision-
making. It is not introducing a parallel universe to
the world of rewards, incentives, and opportunities.
Rather, like globalization and the Internet, it adds a
set of tools to be used in a new battle for adaptability,
where only the fittest will survive.
For more updates visit www.awarenessintoaction.com