Comments: The Industry and Climate Change

Abstract

Editor's column Energy companies will keep a close eye on this month's global summit on climate change in Copenhagen, hoping to get some direction on how global environmental policies will affect the industry for years to come. More than 100 countries will meet to negotiate a world-wide framework for tackling climate change and create a successor treaty to the Kyoto Protocol. Although the causes and extent of climate change may be controversial, there is no doubt that public policy is moving in a direction that will burden industry with more public scrutiny, more reporting requirements on emissions and other data, and more costs related to reducing emissions. The situation is similar to the 1970s and 1980s in which the oil industry suddenly faced a slate of new health, safety, and environmental regulations. "The pressure to reduce global greenhouse-gas emissions is becoming a defining feature for the energy sector," says Robert LaCount, a senior director at IHS/Cambridge Energy Research Associates (CERA) and head of their Climate Change and Clean Energy Group. An agreement at the summit could pave the way for rapid development and use of carbon capture and storage technology, or could spur the process of developing a global cap-and-trade scheme. A cap-and-trade market would set a carbon emissions limit for companies or countries but would allow them to buy allowances from others that were under their cap. Many transportation sectors favor this approach in lieu of carbon taxes. But it is becoming clear that changes will need to be made on both the supply and demand side of the equation no matter how aggressive new emissions targets are. On the demand side, limits may be placed on fossil fuel use and there will need to be aggressive investment in improving energy efficiency. On the supply side, meeting emissions targets would appear to support more use of nuclear, renewables such as wind and solar, biofuels, and implementing carbon capture and storage technologies. Limits on coal use by utilities could greatly increase natural-gas use. In short, the world will require more energy at a much-reduced impact on the environment. Going forward, oil and gas firms will be required to assess their "carbon footprint" and report those results to stakeholders and regulatory bodies, IHS/CERA believes. Stakeholders will increasingly demand, and governments will require, more quantitative and less qualitative sustainability reports from oil companies. Environmental policies will become a business driver, informing strategy and investment decisions, and environmental issues will become more important financially as greenhouse-gas emissions become an asset or liability in cap-and-trade programs. Firms will need to track emissions, manage emission-reduction targets, assess performance, report to regulatory agencies, and evaluate the operational impact. Although there is no consensus on policy as of yet, oil and gas companies should prepare for a more complex future.