WRI Stories Feed: ENVEST: Environmental Intelligence for Tomorrow's Markets

Closing the Bankers' Loophole in Emissions Reporting

Shally Venugopal — Mon, 28 Sep 2009 09:53:24 -0400

Financial institutions are learning to protect investors–and themselves–from investments exposed to risk from climate change.

As the country reflects on the anniversary of the fall of Lehman Brothers and the subsequent bailouts of major banks, pressure is mounting for financial institutions and companies to more fully disclose their investment risks, especially those risks from climate change.

Investments in carbon-intensive projects are no longer a safe bet. Companies, under pressure from shareholders, have been pulling support and cancelling plans to construct new coal plants. Two years ago, in a move that showed increasing concern for investments in heavily polluting industries, top investment banks participated in a leveraged environmental buyout of TXU, a major Texas power company, which meant dropping 8 out of 11 planned coal plants. New York has required energy companies to disclose their climate change risk exposure to investors, and The National Association of Insurance Commissioners has adopted new mandatory requirements that insurance companies disclose the financial risks they face from climate change as well. And in the U.K. banks are under pressure to report their emissions from investments after revelations that taxpayer dollars were potentially bankrolling highly polluting projects.

As WRI’s new issue brief Accounting for Risk shows, there are powerful incentives for financial institutions to manage their environmental risk, whether it’s for reputational reasons or to insulate their shareholders from climate change risks.

But before a company can reduce its greenhouse gas (GHG) emissions, it must first know what those emissions are and where they come from. That’s the idea behind the Greenhouse Gas Protocol, the most widely used accounting tool for companies to track, quantify, and then manage their GHG emissions.

The GHG Protocol has become the international standard, used by top corporations, NGO’s, government agencies, and other organizations. However there is one sector that can fall through the cracks: financial institutions.

Here’s how it happens. Per the GHG Protocol Corporate Accounting and Reporting Standard, companies can choose whether to report emissions (1) based on their ownership in a company or project, or (2) based on companies that they financially or operationally control. Most financial institutions choose to report emissions only from entities or projects that they operationally control, including emissions from sources like purchased energy for building operations or company-owned cars. For a typical financial institution these emissions are relatively insignificant.

Operational Boundaries of GHG Emissions: Credit: New Zealand Business Council for Sustainable Development

But using “operational control” as the institution’s boundary for measuring its emissions could be problematic or even misleading. For example, by using this reporting method, emissions from investments in coal plants, or lending to oil and gas companies would not be reported, giving investors an incomplete understanding of the institution’s carbon impact.

Citigroup, one of the few companies that reports on emissions from some project financing, gives us a rare glimpse into just how much other companies could be underreporting. In 2007, Citi reported its total environmental footprint (scope 1 and 2) at about 1.4 million metric tons of CO2, but estimated its share of CO2 emissions from financing just two thermal power plants to be almost 200 million metric tons of CO2 (~3.3 million metric tons on an annual basis based on a 60 year life) [edited on 10/2]. That’s a big difference, and, like Citigroup, most other financial institutions’ traditionally reported scope 1 and 2 emissions will be tiny when compared to their share of emissions from investments.¹

These discrepancies show why it’s necessary to develop specific guidelines to help financial institutions report their full GHG emissions consistently and accurately. The World Resources Institute has taken the first steps with Accounting for Risk, a new issue brief that gives an overview of options for companies looking for better reporting options.

The report makes a strong case for why financial institutions should both measure and report the GHG emissions in their investment portfolios. One is the matter of reputation. Institutions can get a lot of mileage from being leaders in GHG accounting, and proactively branding themselves as transparent and eco-conscious. In general, stakeholders have applauded institutions that allocate less capital to dirty sectors and more capital to clean sectors. In a conversation with representatives from Citigroup, Valerie Smith, Vice President of Corporate Sustainability, told us that their decision to report “really came out of stakeholder requests, and there has only been positive feedback.”

A big business case for [reporting] is that it really gets the institution thinking about carbon risk. And the first step in doing that is understanding how to calculate it.

—Courtney Lowrance, Citigroup

Better accounting is also smart for business. By fully tracking “investment related emissions,” these institutions can manage their climate-risk exposure and become more aware of carbon-intensive holdings and potentially bad investments. It’s important for an institution to have a clear picture of its total emissions, especially if pending legislation puts a price on carbon. According to Courtney Lowrance, Vice President of Environmental and Social Risk Management at Citi, “A big business case for [reporting] is that it really gets the institution thinking about carbon risk. And the first step in doing that is understanding how to calculate it.”

“Standard guidelines would absolutely help,” adds Eliza Eubank, Assistant Vice President of Environmental and Social Risk at Citi. “It always helps to be able to make apples to apples comparisons. If everyone is finding their own way and designing their own methodology, then you really don’t know how to compare different numbers that different people are putting out there.” Without guidelines, deciding what and how to report, “can be a very dicey issue.”

As consensus grows for the need for updated guidelines, WRI’s next step is to convene stakeholders (including banks, accounting firms, consultants, NGOs, and funders) and develop a strategy for implementing more specific GHG reporting standards. The success of the GHG Protocol shows that this approach can work, and WRI hopes these next steps will keep the GHG Protocol tools and standards relevant and effective for a broader range of organizations.

In 2007, Citi changed its reporting methodology from reporting based on a proportion of the total debt capitalization of a project, to reporting based on a proportion of the total capitalization of the project. The 192.8 million metric tons of CO2 reported in 2007 is based on the Citi’s proportion of total debt capitalization over the 60 year lifespan of the projects. Based on the new methodology, the proportional share of total capitalization is 79.5 million metric tons, or ~1.3 million metric tons annually. While lower, this is still close to Citi’s reported operational emissions for the entire year. [edited 10/2] ↩

Environmental Challenges for the Food and Beverage Industry

Dana Krechowicz — Thu, 27 Aug 2009 14:40:00 -0400

Climate change and water scarcity will have a big impact on the food and beverage industry in Asia, due mainly to the changes in growing conditions for key agricultural inputs. That’s the primary finding of WRI’s forthcoming report: Weeding Risk, due out in October.

The current drought in India could be a harbinger of things to come. A 2 month long drought has afflicted almost half the country during this summer’s rainy (monsoon) season. The monsoon rains that are critical for crops such as rice, soybeans, and sugarcane, are 85% below normal. As a result, India’s sugar crop in 2008 was 45% lower than the previous year, and this year’s crop is expected to be the same or worse.

Overall food prices in India have risen 10%, owing largely to the drought. And global sugar prices have reached a 28-year high, in part because of lower production in India (India is the 2nd-largest sugar producer, in part because of growing demand for ethanol. Climate change’s impact on precipitation patterns is predicted to make droughts such as this year’s more common and prolonged than in the past.

What does this mean for investors in the food and beverage industry? WRI’s forthcoming Weeding Risk report attempts to answer those questions by examining the impact that climate change and water scarcity would have on key sub sectors, including aquaculture, dairy, poultry, tea, sugar, starch and confectionery and edible oils.

The report’s main findings are that climate change and water scarcity can have the following impacts on the sector:

Raise agricultural commodity prices and increase price volatility by decreasing yields.
Increase processing costs through operational disruptions and treatment costs.
Create food safety challenges and conflicts with local communities over resource use

Leading F&B companies will find ways to build corporate and supply chain resilience to potential risks. Companies that understand the risks they are facing, and are actively building their resilience to the impacts, are better long term investments.

The forthcoming Weeding Risk report is being produced in partnership between WRI, the International Finance Corporation (IFC), and HSBC Bank.

Reports Highlight Urgent Environmental Risks Facing Investors, Companies in Emerging Asia

Paul Mackie — Thu, 25 Jun 2009 11:52:22 -0400

Environmental risks and opportunities that are overlooked by investors and companies will impact the financial performance of companies in India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

These are among the findings from two new reports by the World Resources Institute (WRI) and the International Finance Corporation.

The reports - Emerging Risk: Impacts of Key Environmental Trends in Emerging Asia and Undisclosed Risk: Corporate Environmental and Social Reporting in Emerging Asia - are being released at a critical time.

Until recently, these Asian markets have focused largely on environment-related reputational risk. But the report additionally highlights the operational, regulatory, and legal dimensions of environmental risks already flowing through companies’ value chains. For example, recent flooding affected companies in Indonesia significantly. Two major floods translated into real impacts on the population and on the country’s largest companies, resulting in declining stock prices and severe infrastructure degradation.

Euan Marshall, program manager of IFC’s Sustainable Investing unit, said, “The global financial crisis is causing companies and investors to reconsider the question, ‘What is risk?’ The investment community has begun to value companies based on how they respond to climate change risks. However, more needs to be done, and companies and investors need to understand the relevance of environmental risk in the context of aggregate financial risk.”

Dana Krechowicz, lead author of the reports and an associate at WRI, added, “Scarcity of water and climate change, among other risks, have and will increasingly affect the region. Economic impacts will be magnified if companies and investors are not well prepared.”

The two reports set the stage for a series of sector-specific reports to be published later this year by IFC, WRI, and HSBC that will identify material environmental risks and opportunities in the region’s food and beverage, real estate, and power generation sectors.

The series of reports are being completed in partnership with the Japanese government.

Short- and Long-Term Business Impacts of Environmental Trends in South Asia

Filling the Investment Information Deficit

Dana Krechowicz — Fri, 20 Mar 2009 14:11:23 -0400

As the recession deepens, investment firms are cutting back on ESG research. That’s a mistake.

Even in the current economic downturn, the level of assets under management with socially responsible investment (SRI) mandates reached unprecedented levels globally in 2008. Interest from mainstream investors in exploring the financial materiality of ESG issues has also been increasing in recent years.

Nonetheless, basic investment research in general—and environmental, social and corporate governance (ESG) research in particular—is facing severe cutbacks, especially in the United States. JP Morgan, Citigroup and Merrill Lynch have all recently cut their dedicated ESG research departments.

ESG research is essential for SRI asset management and critical for mainstream investors seeking to understand the financial materiality (i.e., impact) of ESG issues. Cutting dedicated ESG research is short-sighted, particularly now.

First, at least a portion of the cause of the crisis can be attributed to financial analysis that undervalued long term risk. If anything, the financial crisis increases the need for investment research that has a long-term horizon and considers a broader range of issues, as is the case with ESG focused research.

Second, ESG thematic research better equips investors to analyze how the companies they invest in are truly positioned to manage complex challenges and take advantage of opportunities. As the global environment crisis deepens, the need for investors to understand the implications for the companies they invest in is essential.

ESG research by financial institutions has a lot of room for improvement and expansion. While there is plenty of climate-related research, particularly for heavy emitting sectors such as utilities, ESG research in other sectors such as banks, pharmaceuticals, and telecommunications is still sparse.

Mainstream banks are limited in their ability to serve long term investor needs. The provision of free research to clients necessitates cost recovery from the investment banking business which creates a fundamental conflict of interest that can negatively impact research quality. In addition, the complex relationships between the buy and the sell side that financial institutions face further compromises their ability to be transparent about negative information.

In this environment, independent ESG research is more important and relevant than ever before. WRI’s Envest research is helping to fill the gap by analyzing and quantifying the financial implications of environmental risks and opportunities, and working to increase disclosure of relevant data by companies and regulators.

Envest’s independent research helps investors better understand the financial relevance of environmental trends that impact their investments. One example is our recent report, “Rattling Supply Chains,” which demonstrates the necessity of sustainable sourcing strategies for firms in the fast-moving consumer goods sector. The report concludes that firms will face price increases for key commodity inputs.

In a turbulent investment market, it’s all the more important that investors understand the dynamics and risks that environmental issues present that affect their investments. Independent research and risk analysis is more vital than ever.

Consumer Goods Companies Face Major Earning Hit Without Smart Environmental Sourcing

Nate Kommers — Tue, 02 Dec 2008 09:03:34 -0500

Companies in certain consumer goods sectors that do not implement sustainable environmental strategies could face a potential reduction of 13 percent to 31 percent in earnings by 2013 and 19 percent to 47 percent in earnings in 2018.

These findings are the result of a “future scenario” analysis released today by the World Resources Institute and A.T. Kearney, Inc. It is titled Rattling Supply Chains: The Effect of Environmental Trends on Input Costs to the Fast Moving Consumer Goods Industry, and is the first report of its kind to calculate the financial impact of environmental issues facing this industry.

The analysis provides consumer packaged goods executives with a tool to assess how environmental legislation and climate change could impact their businesses in future years. It also outlines how these executives can begin to develop strategies to address these issues.

Although the current financial crisis has resulted in declining commodity prices, the authors find that environmental pressures will continue to impact the supply and price of key commodities in the long term. The crisis should be viewed as an opportunity to address these challenges through transformational change and not as a time to ignore them.

“The Ecoflation scenario is a vision of a future where companies have to deal with environmental costs previously borne by society,” said Andrew Aulisi, director of WRI’s Markets and Enterprise Program. “Environmental concerns are driving a global trend of policy activism and regulation. Our scenario describes this trend and the most pressing environmental challenges, and finds that the earnings of consumer goods companies are exposed to significant risk rising out of their supply chains.”

For their research, WRI and A.T. Kearney based the “ecoflation” scenario on major environmental trends and policy developments, such as U.S. and international climate change regulations, enhanced forest policies, growing water scarcity, and new biofuel policies. They then analyzed how these drivers might affect prices on selected commodities like oil, natural gas, electricity, cereals and grains, soy, sugar, palm oil, and timber. The results offer tangible illustrations of how environmental costs might impact the value chain, especially for fast-moving consumer goods that are usually produced in large quantities, such as food and beverages or household products.

Cereal prices, for example, are shown to have upward pressure from climate change policy and growing water scarcity, but may be reduced if certain biofuel policy changes reduce ethanol demand. The report finds a 6 to 13 percent increase in cereal commodity prices due to these pressures.

“The results highlight the need for strategic scenario-based planning,” according to Daniel Mahler, A.T. Kearney partner. “Winning companies will anticipate this changing landscape. These companies will collaborate with suppliers and other stakeholders, and make environmental sustainability a key business principal.”

Rattling the Supply Chain outlines a four-step process to develop a robust strategy around a company’s sustainability challenge and opportunities:

1. Understand environmental impacts and dependencies by examining how cost drivers are exposed to emerging environmental trends and, when possible, seek substitutes with lower environmental impacts.
2. Take inventory of current sustainability initiatives through the value chain to see what the company, its suppliers, and its partners are addressing.
3. Prioritize environmental issues and opportunities according to their current and future potential impact on costs, revenues, and reputation.
4. Chart a new course by having a cross-functional team systematically evaluate opportunities to reduce cost exposure to critical input commodities. This evaluation should include product re-design, backwards supply chain integration, local versus global sourcing, and an upgrade of sustainability standards for the supply base.

Subprime Carbon: Preparing for the Dangers of Hidden Carbon Risk

Hiranya Fernando — Thu, 30 Oct 2008 09:07:02 -0400

WRI is drawing lessons from the subprime mortgage crisis to prepare the financial community for another potentially paradigm-shifting market change: the advent of carbon regulation.

With the Wall Street financial meltdown on everyone’s mind, the dangers of hidden risks are a timely topic. At a minimum, there are two key lessons here with respect to climate change and carbon risk.

First, markets may operate in a way that routinely ignores or misprices an important risk. Many things can contribute to this, including short-term, deal-driven incentives, poor risk analysis by internal auditors and external agencies, and lack of government oversight. These problems can be exacerbated by financial sophistication that adds complex layers to financial products. Products such as mortgage-backed securities may have helped to fuel easy credit and an avenue to pass on bad debt.

“If you really take a fine-tooth comb and go through your portfolios, many of you are going to find them chock-full of subprime carbon assets.”

- Former Vice President, Al Gore

When information is unclear or muddied, risk can get dangerously mispriced. And that’s also true with carbon assets. With future carbon-related legislation as a constant moving target, added to the complexity in compiling GHG inventories, no one knows exactly what the real carbon risks are today. Put simply, they are difficult to decode.

Second, new financial players who hold significant positions in diverse industries along complex supply chains create an environment in which market turmoil in one sector can ripple through to other, sometimes seemingly unrelated, sectors. Likewise, the introduction of a carbon price impacts costs, revenues, profitability, cash flow, and market share of companies. Certain businesses may be unable to perform under carbon price constraints.

In the forthcoming Issue Brief on “Subprime Carbon,” we look at how carbon risk creates significant credit risks across diverse industries, for businesses and investors alike. These risks include:

Supply Chain Risks: Increased input costs and price pressures are likely to affect company cash flows and bottom lines.
Product and Technology Risks: Operating efficiency and competitive advantage may be compromised as competitive products, technologies and processes that limit carbon emerge.
Regulatory Risk: As policymakers set emissions cap, develop inventory methods and apply rules to different industries, companies face rising and uncertain compliance costs.

Here are some of the questions we consider and attempt to answer in our Issue Brief:

Are financial markets and businesses doing something to mitigate these risks?
Are businesses creating alternative strategies to respond to potential cost increases in their supply chain?
Are rating agencies weighting the full range of credit risks associated with the introduction and volatility of a carbon price?
Are portfolio managers fully aware that associated regulations and subsequent market movements could have significant effects on fixed income fund performance even with a diversified portfolio?

Debt markets are in the beginning stages of considering carbon risks as part of their decision making process. Much of their efforts to date focus on carbon risks related to relatively obvious sectors such as energy and utilities. But less direct risks from carbon costs are rippling through the supply chain and across various industries—these types of risks are harder to capture, but no less significant.

It is time for portfolio managers to scrub their portfolio, for rating agencies to reevaluate their rating, and for stakeholders to create tools that identify, “subprime carbon”-backed debt and the credit risks of underlying counterparties. No one denies that it is a challenge to assess and quantify carbon/climate risks accurately. But by ignoring them, we run the bigger risk of repeating some of the same mistakes that contributed to our current financial woes.

A New Climate for the Forest Products Industry

Amanda Sauer — Wed, 16 Jul 2008 18:08:57 -0400

The forest products sector holds an enormous stake in the coming economy defined by resource constraints, climate change policies, and shifting consumer values. What was once a simple business of turning trees into lumber and paper is now uniquely positioned—or exposed to—political and economic forces that are reshaping regulatory and market landscapes.

Less than five percent of the world’s forests are plantations, yet this five percent provides 50 percent of all wood supply and fiber. Efforts to control climate change and deforestation will likely make plantations and other managed forests increasingly important for the forest products industry. If done sustainably, this could be a real opportunity for the industry to help protect native forests in areas such as southeast Asia, while meeting the growing global demand for wood and paper.

Another issue is found in the mounting questions regarding bioenergy. While a forest-based source of bioenergy that wouldn’t significantly affect food prices might be attractive, the environmental and social impacts are still unknown. Whether or not forests can sustainably provide wood, paper and transportation fuel is an unanswered question, and this uncertainty makes for real business risk.

Increasing demand for low-carbon construction materials is also important to consider. Construction materials from sustainably produced wood are far less carbon-intensive than steel or concrete. On average, using wood products save two tons of carbon dioxide per cubic meter over other construction materials. It is clear the wood products industry could be a major provider of low-carbon materials, but what strategies will be most advantageous?

Trees in the Greenhouse: Why Climate Change Is Transforming the Forest Products Business, a new report by WRI, looks at the industry’s exposure to climate change risks and opportunities. The report finds that while risks exist, climate change presents a potentially game-changing opportunity for the industry through:

new markets and products for forest goods and services,
competitive advantages in relation to carbon-intensive substitute materials,
enhanced forest productivity,
increased demand for sustainable forest management, and
green consumer preferences.

Climate change policies will be vital to realizing this opportunity. Forest products will need to be produced and consumed in a sustainable manner for the industry to create long-term value through contributions to global climate change solutions.

The report also finds that a clear, long-term international policy framework could benefit the industry by:

lessening uncertainty around the physical impacts of climate change on forests,
spurring an increase in the amount of sustainably managed forest in new regions, particularly in developing countries where illegal logging drives down prices, and
creating incentives to substitute sustainable forest products for more carbon-intensive alternatives.

When it comes to regulation, the industry is fragmented, and in many cases divided over what represents appropriate climate policies. Nonetheless, with the right regulatory frameworks in place, both internationally and nationally, the forest products industry could be a major solutions provider to climate change while seizing some of the greatest market opportunities of the 21st century.

Forest Industry Must Act to Benefit from Climate Policy

Nate Kommers — Mon, 30 Jun 2008 09:35:16 -0400

While there are risks for the forest products industry, it largely stands to gain from efforts to address global warming due to new opportunities for sustainable forestry, according to a report released here today by the World Resources Institute.

As U.S. policy regarding climate change continues to build momentum, industries from across the economy are investigating the potential impacts to their businesses. The forest products industry is somewhat divided on how to address climate policy, mainly due to uncertainty around the financial implications.

“The next year or two is an important window for climate change policy negotiations in the U.S. and internationally. The industry needs a coordinated effort to improve the position of sustainable forestry to become part of the climate change solution,” said Andrew Aulisi, director of the markets and enterprise program at WRI. “Anything past this window may be too late. Competing industries are already moving quickly on their positions.”

WRI’s report, Trees in the Greenhouse: Why Climate Change is Transforming the Forest Products Business, details how climate change may affect the forest-based products industry. It concludes that, should a price on carbon be established in the U.S., the forest industry should soon have measures in place to capture the resulting opportunities.

The forest industry’s concerns include:

Opportunities for new revenue streams and markets for forest products that could benefit well-positioned companies.
Changes in the biological productivity of forests in some regions due to climate change.
Shifts in access to forestlands as they become more restricted and better managed.
Opportunities for forest products to be designated as “low carbon.”

The report outlines several steps that the forest industry and investors should pursue to best position themselves for economic conditions under a climate change policy. It also acknowledges that climate change policies may also bring new risks to the industry, and that investors and companies should develop appropriate risk-hedging strategies.

In addition to providing preliminary answers for forest companies and analysts, the report is also informing WRI’s ongoing efforts to help companies evaluate the risks and opportunities arising from changes in ecosystems, such those to forests. WRI is currently building a new corporate partnership dedicated to advancing business strategies, markets, and public policies that align corporate performance and ecosystem stewardship.

Banco Real Named Sustainable Bank of the Year

Hiranya Fernando — Thu, 05 Jun 2008 14:32:49 -0400

Brazil’s Banco Real took the top prize at the third annual Financial Times/International Finance Corporation Sustainable Banking Awards dinner in London. Each year, the awards recognize banks and other financial institutions for their leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.

Rabobank was the runner-up in the Sustainable Bank of the Year category. ABN Amro won last year, and HSBC received the top honor in 2006.

Banco Real also took home the top award in the Sustainable Emerging Markets Bank category. The judges said of Banco Real’s work on sustainability in Latin America: “It’s in their DNA.”

More banks from around the world are becoming agents for environmental and social development. In the process, they help create a new generation of strategies, products, services, and technologies to address the financial, environmental or social challenges of sustainability.

The FT/IFC Sustainable Banking Awards have grown in popularity since they launched. This year’s nominees were selected from a record 182 entries from 129 institutions in 54 countries. In 2006, 98 entries were received from 48 banks in 28 countries.

The panel of judges consisted of many leading figures of sustainable finance, including World Resources Institute’s Jonathan Lash, with the support of the WRI capital markets team. The judges studied, debated, and ranked submissions from 10 candidates in each category. The final winners were announced at last night’s FT/IFC Sustainable Banking Awards dinner.

YES Bank won the Emerging Markets Sustainable Bank of the Year Award for providing responsible financial services, minimizing their environmental impact, supporting local communities, launching an SRI fund in India and engaging in microfinance.

The Sustainable Deal of the Year Award went to Morgan Stanley and BlueOrchard for their microfinance structured product. The category recognizes the financial institution that in the previous year completed a transaction with outstanding social, environmental and financial impact. The deal’s innovation and potential for replication is also taken into account. The runner-up was Glitnir Bank of Iceland for its support of geothermal power generation.

Two new categories have been added to this year’s awards–Banking at the Bottom of the Pyramid and Sustainable Investor of the Year—which has broadened the awards to include financial institutions not directly involved in banking.

ASA won the Banking at the Bottom of the Pyramid Award for its development and delivery of innovative, viable and replicable financial products and services that engage and empower Bottom the Pyramid (BOP)–the more than 4 billion people who live on less than US$2 a day. Wizzit was runner-up.

The Sustainable Investor of the Year Award highlights a ground-breaking achievement in sustainable investment, recognizing specific investments, or overall investment programs with outstanding triple bottom-line results. E & Co won the award for its financing of a transit system in South Korea, and SAM (Sustainable Asset Management) was the runner-up for it’s participation in a geothermal heating system project in China.

Find a full list of winners click here.

Major Policy Intervention Required to Boost Carbon Capture Potential

Nate Kommers — Wed, 04 Jun 2008 00:00:00 -0400

A World Resources Institute (WRI) analysis of the complex challenges that investors would face when deploying carbon capture and storage (CCS) technologies shows that until government policies support large-scale demonstrations it is unlikely that CCS will be able to fulfill its potential in combating climate change.

Carbon capture and storage, the process whereby carbon dioxide from a coal-fired power plant is injected deep underground to prevent it from entering the atmosphere and contributing to climate change, could play a significant role in reducing greenhouse gas emissions while allowing for the continued use of coal as an energy source. Coal is one of the cheapest fuels for power generation, and its affordability and large domestic reserves make it likely to remain so for some time.

However, using CCS technologies to inject carbon dioxide from coal combustion into underground formations will require solutions to a host of technical, regulatory and financial challenges, according to the analysis.

The analysis shows that if these challenges are to be overcome in a timeframe for CCS to play a meaningful role in the fight against climate change, not only must there be a price on carbon that is high enough to make CCS technologies cost-competitive, but there must also be immediate government intervention in the form of support for large-scale demonstration plants far beyond current efforts.

The full analysis is detailed in the WRI report Capturing King Coal: Deploying Carbon Capture and Storage Systems in the U.S. at Scale, released today.

“Unless we can put a price on carbon and push these new technologies into the market with additional incentives CCS won’t arrive in time,” said Dr. Jonathan Pershing, director of WRI’s climate, energy and pollution program. “We need to deploy the technology as quickly as possible - and that in turn means paying for large scale demonstrations and infrastructure, and creating a regulatory environment that provides public confidence in the safety and environmental integrity of the technology.”

The report points to the need for rapid progress in the technological, regulatory, financial and policy fronts for CCS to become a solution to climate change.

The technological challenges facing CCS are focused around developing several different technologies at differing levels of maturity that will have to operate in concert for the process to work on a large scale.

On the regulatory front, WRI has engaged a diverse set of stakeholders to develop guidelines for CCS. This effort is taking place in the context of rapid changes in the policy arena, as the U.S. EPA has initiated a process to develop regulations governing the underground injection of CO2 for sequestration. The WRI guideline project provides a transparent forum for communication of best practices and regulatory recommendations for carbon capture, CO2 transportation and underground sequestration to a broad array of stakeholders. The expected release of the WRI CCS guidelines is this fall, and today a group of CCS experts convened to discuss key technical issues.

Both the King Coal report and the guideline effort frame key issues around long-term liability for underground sites where carbon dioxide will be stored. Since the gas must stay underground for centuries, there must be clear guidelines for liability from leakage 100 years or more into the future.

Unique financial and investment challenges will also have to be overcome in order to create a CCS infrastructure in the U.S. In addition to the large capital investment that will be required, a more immediate concern is that construction firms, already facing rising costs, may be reluctant to extend performance guarantees to coal plants built with untested technology.

“All of these are intimidating challenges, but if we get some steel in the ground and some demonstration plants running, the investment community will follow,” said Hiranya Fernando, a senior associate at WRI and one of the authors of the report.