climate change: strategic issues for management … and cpd courses docs...carbon-ethics for...
TRANSCRIPT
Climate Change: Strategic Issues for Management Accounting
By
Prof. Janek Ratnatunga
Professor and Head of SchoolUniversity of South Australia
Research sponsored by:
Introduction to the topic
The Greenhouse Effect
Sources Sinks
The Hockey Stick
• CO2 fromSiple Ice Core vs. Age.
• However, there is much debate (especially amongst politicians) if Human activity has caused this “Hockey Stick” effect.
The Reverse Hockey Stick
Carbon-ethics
• Do We Need an Economic Solution (e.g. Kyoto)?– The Schumacherian ideal
– Meta Economics
• We should reduce our carbon footprint purely on moral grounds
Intermediate Variable ConsequencesPreconditions
Behavioral
Response by
Individuals and
Business Entities
Reduction of Greenhouse Gas Emissions
Change in Value of Business Entity
Greenhouse Gas Emissions in Nature
Greenhouse Gas Emissions by Humans
Carbon-ethics: End of Pipe Solutions
Problem
End of
Pipe
Solution
• Good Carbon Behaviour (Ethical solutions)– Reducing Carbon Footprint (‘Purchasing Green Products’)
– Lifestyle changes (End-of-Pipe Solutions)
Green Products: Life Cycle Costs
All End
of Pipe
Solutions
– CIMA Show-bag products
• Biodegradable Pen (Corn Plastic)
• Cloth Towel
• Green Shopping Bag
– Toyota Prius Hybrid Car
– Carbon Offsets (e.g. Airlines)
– Water-Carbon Trade-off
Carbon-Ethics for Business
Change Lightbulbs to Low Emission Shut off Computers (no standby)
Pay the Carbon Tax Switch off the Lights At Quitting Time
Build a Skyscraper End the Paper Chase
Turn Up the Geothermal Heat Play the Market
Capture the Carbon Think Outside the Packaging
Let Employees Work Close to Home Trade Carbon for Capital
Pay Your Bills Online Set an Organisational Carbon Budget
Open a Window Pay For Your Carbon Sins
Ask the Experts For An Energy Audit Make One Right Turn After Another
Buy Green Power Plant a Tree in the Tropics
Remove the tie (Everyday is Casual
Friday)
Drive Green (Change company
Vehicles to Bio fuels)
Fly Straight to Location If You Must Burn Coal, Do it Right
Copy California’s State Emission
Levels
Set a Higher Carbon Emission
Standard
Turn Food Into Fuel (Bio Fuels) Illuminate Public Spaces with LEDs
Business Reactions
Carbon-Ethics for Individuals
Get Blueprints for a Green House Fly Straight between Locations
Change Light bulbs to Low Emission Support your Local Farmer
Pay the Carbon Offsets when Buying Plant a Bamboo Fence
Move from the Mansion Have a Green Wedding (i.e. Buy Locally)
Hang Up a Clothes Line Remove the Tie (Casual Business Attire)
Give New Life to Your Old Warm Clothes Drive Green on the using Bio-Fuel Cars
Use More Geothermal Heat Just Say No to Plastic Bags
Take Another Look at Vintage Clothes Switch off the Lights At Quitting Time
Work Close to Home Shut off your ComputerRide the Bus End the Paper Chase
Move to a High Rise Building Think Outside the Packaging
Pay Your Bills Online Trade Carbon for Capital
Open a Window (natural cooling) Make Your Garden GrowAsk the Experts For An Energy Audit of
Your Home
Wear Green Eye Shadow (Made from
Renewable Resources)
Buy Green Power, At Home or Away Fill Car Up With Passengers
Check the Label (cheap prices for overseas
products because no Carbon costs are paid)
Rake in the Fall Colours (Rather than
using Leaf Blowers)
Properly iInsulate Your Water Heater Check Your Tires
Avoid the Meat Products Set a Personal Carbon Budget
Be Aggressive about Passive Houses Consume Less, Share More, Live Simply
• The Emerging Paradigm Of Carbonomics– 21st Century ‘Needs’ met with 18th Century ‘Power’
– Economic incentives for the development of sustainable technologies that reduce CO2 emissions (Winners and Losers)
• Wind Farms
• Geothermal
• Water (Hydro and Ocean Waves)
• Nuclear
Carbonomics: Start of Pipe Solutions
Start of Pipe
Solution
No
Problem
• The Kyoto Protocol (ratified by over 150 countries)
– Some have “caps” (e.g. European Countries)
– Some are “thinking” about it (e.g. Australia)
– Some are “exempt”(e.g. China, India, Indonesia)
• International (Cross-Country) Mechanisms– Joint Implementation (JI)
– Clean Development Mechanism (CDM):
– International Emission Trading (IET)
• All three mechanisms required the concept of a ‘carbon credit’ as a: – measurable and tradable instrument
– that is acceptable across nations.
Kyoto Mechanisms
Carbon Credit:
Each carbon credit represents one metric tonne of CO2
–either removed from the atmosphere or
–saved from being emitted.
Carbon Credit Definition
• Country Level Issues (Three principle Ways to
‘Manage’ Carbon Emission Targets):
– By Taxation. By imposing a straight tax on emissions.
– By Allocating ‘permits’ or ‘ration cards’ to business
entities or individuals for a cap and trade system.
– By Approving certain organisations as being able to issue
carbon credits (called ‘abatement certificates’)
Managing Carbon Emission Targets
The Climate Change Debate
• Carbon Emissions Trading (Requires a Cap-and-
Trade system)
– Ideally be based on free-market principles
– Each individual emission allowance has a ‘vintage year’
designation (that is, the year an allowance may be used)
– Brokers and other non-participants typically buy and sell
emission allowances in (vibrant) secondary markets.
– The European Union Emission Trading Scheme (EU
ETS) is the world’s largest multi-country cap and trade
system.
Carbon Emissions Trading
Carbon Trading: The Invisible Hand
Intermediate Variable ConsequencesPreconditions
Behavioral
Response
by Business Entities
Reduction of Greenhouse Gas Emissions
Change in Value of Business Entity
Greenhouse Gas Emissions in Nature
Greenhouse Gas Emissions by Humans
Behavioral
Response
by
Business
Entities
Carbon Trading Scheme
Reduction of Greenhouse Gas Emissions
Change in Value of Business Entity
Greenhouse Gas Emissions in Nature
Greenhouse Gas Emissions by Humans
Intermediate Variables ConsequencesPreconditions
Carbon Credit Certification
Xtrees
= =
Carbon
Credit
Ytonnes of CO2
CO2 CO2
CO2 CO2
$ Z
• Carbon (Emission And Sequestration) Accounting
– The CES accounting mechanism must be sufficiently robust that the carbon trading market has confidence that
the amount of carbon sequestered can be measured, i.e.
• CES Accounting Standards
– Any CES accounting standard developed by a country or
NGO will need to be consistent with the
Intergovernmental Panel on Climate Change (IPCC)principles.
– There are at least 21 organisations offering accreditation and auditing services, across the globe
– the new market is largely unregulated and lacks transparency
CES Accounting & Assurance
Carbon Trading Bubbles
Management Accounting Issue
• Firms operating in a carbon rationing jurisdiction:
Carbon Investment Appraisal
The options available to manage
carbon emissions liability:
• Do nothing and buy carbon credits
• Undertake Carbonvestments:
– Undertake internal projects to lower
carbon liability
– Invest in external projects to offset
carbon footprints
– A combination of both internal and
external investments
Expected usage
100,000 MT
CO 2 Equivalent
Wait till
End of Reporting
Period
Buy Credits
in ETS Market (Max
Price A$46)
Max Cost
A$ 4.6 m
Emissions Management: Alternative Strategy No.1
Exp. Usage 100,000 MT
CO 2
Equivalent
Re-estimate CO2
Emissions at End of
Reporting
Period
Forward BUYBalance (10,000
MT)Credits in
ETS Market (@ market price
A$12) =A$.12m
Expected Cost
A$ 0.97 m
(Saving
A$3.63m)
Undertake Internal Abatement Projects
(Cost: $0.3m); CO2 saving: 40,000 MT)
Undertake International CDM Projects
(Cost: $.55m); CO2 saving: 50,000 MT)
Emissions Management: Alternative Strategy No.2
SELL Balance (10,000
MT)Credits in
ETS Market (@ market price
A$12) =A$.12m
Expected Cost
A$ 0.88 m
(Saving
A$3.72m)
Exp. Usage 100,000 MT
CO 2
Equivalent
Estimate CO2
Emissions at End of
Reporting
Period
Undertake Internal Abatement Projects
(Cost: $0.4m); CO2 saving: 50,000 MT)
Undertake International CDM Projects
(Cost: $0.6m); CO2 saving: 60,000 MT)
Emissions Management: Alternative Strategy No.3
Strategic Cost Management
SCM Issue Carbon Management Impact Management Control Systems
Employee behavior modification to achieve carbon efficiency targets
Production
Management
Lean production techniques. More attention to the use of energy in machinery, less materials and time wastage. JIT philosophy.
Employee Safety Ensuring low energy work environment do not cause hazardous working conditions
Wages & Trade Union
Demands
May demand more if comfort levels fall. More demands for the sharing of high carbon windfall profits
Total Quality Management
Carbon efficiency seen as part of quality equation
Purchasing
Management
Production resources (components, labor, and overhead) sourced locally.
Strategic Cost Management
SCM Issue Carbon Management Impact Cost Control Lean Accounting. Significant attention paid to reduce
carbon emission costs. Backflush Costing methods Make or Buy
Decisions
Consideration given to carbon emissions when considering alternatives
Cost Classification Carbon costs classified into direct, indirect, fixed and variable costs.
Allocating Indirect Costs
Consideration of 'carbon cost drivers' to link emission indirect overhead to products and services
Life Cycle Costing Amortization of design costs to make products more carbon friendly and worker training costs to reduce carbon emissions
Target Costing Redesigning products and services to meet carbon emission targets
Benchmarking Comparing the KPIs of World Class performers in carbon efficiency
Cust. Prof. Analysis Segmenting customers by profitability per carbon usage Process Control and Activity Based
Management
Evaluating the performance of organizational processes, including white-collar departments in terms of achieving carbon efficiency KPIs.
Strategic Cost Management
SCM Issue Carbon Management Impact Efficiency or Productivity
Consideration given not only to economic efficiency, but also carbon usage efficiency.
Price Relationship or
Recovery
Reductions in purchase prices considered via the sale of carbon efficiency credits
Overall Effectiveness This profitability of the bottom-line figure given in terms of both economic and environmental effectiveness.
Value-Adding/Non-Value Adding Work
All reworks, recoveries, errors etc. considered to be avoidable carbon emitting activities
Executive Information
Systems (EIS)
The drill-down facilities to be extended to financial and non-financial carbon emitting measures.
Corporate Governance Accountability and transparency issues extended reporting on carbon management initiatives
Enforcement and Compliance
Voluntary and mandatory enforcement of carbon emission targets
The Strategic Audit Extended to cover the expected future carbon footprint of the organization due to its production, marketing, logistics, capital investment and HRM practices
Corporate Reputation
Audit
The evaluation of the organization’s image and brand with regards to being a responsible carbon citizen of the world.
Strategic Management Accounting
SMA Issue Carbon Management Impact
Business Policy
Primary Objective Sustainable Value Creation
Competitive
Advantage
Carbon efficiency seen as a marketing mix variable in product differentiation. An Efficient Carbon Management (ECM) focus also taken in cost leadership strategies.
Line-of-Business ECM seen as a potential line-of-business
Competition and
Industry Structures
Adding a sixth force to Porter's Five Forces Model - the impact on the Industry of Carbon regulation (Porter, 1980 and 1983).
Gap Analysis Strategies considered to close gap between current emission levels and future emission targets
Environmental
Externalities
Considered 'internalities' in product-market decision making and HRM
Risk Management Consideration of the impact on cash flows and reputation of the company as a result of the carbon strategy positioning of the company. Risk vs. Reward outcomes (e.g. cash flow at risk) should be considered.
SMA Issue Carbon Management Impact
Human Resource Management
Corporate Culture A carbon lifestyle culture from grass roots level upwards. Low carbon footprint activities encouraged. Excellence sought in seeking continuous improvement in ECM
Empowerment Employees given resources and responsibility to participate in ECM in lowering the organization’s carbon footprint
Marketing Strategy
Strategic Management Accounting
SMA Issue Carbon Management Impact
Marketing Strategy
Products and Markets Carbon impact considerations considered systematically in all product-market strategies
Marketing Research Undertaken to determine the needs of customers in terms of participating in reducing carbon emissions and the incremental price they are willing to pay for this (carbon consciousness)
Market Segmentation Separating customers geographically, demographically and psychographically in terms of their carbon consciousness.
Positioning Strategy Consideration of taking an 'active or 'passive' positioning in terms of ECM as a source of competitive advantage.
The Product Life Cycle (P.L.C.)
Consideration of the carbon footprint left by product throughout its life cycle, especially in the decline and obsolescence stages.
Strategic Management Accounting
SMA Issue Carbon Management Impact
Marketing Strategy (Cont)
Market Penetration Strategies
Using carbon efficiency of existing products as an attribute to sell more to existing carbon conscious customers
Market Development
Strategies
Using carbon efficiency of existing products as an attribute to sell new carbon conscious customers in new segments
Product Development
Strategies
Incorporating carbon efficiency as an attribute in new product designs to keep existing carbon conscious customers loyal to the brand
Diversification
Strategies
Leaving industries having products and markets seen as high carbon emitting to new industries better long-term carbon sustainable prospects (includes investments in JIs, and CDMs under Kyoto).
Experience Curves Organizations with high experience in ECM products and services should have lower costs.
Budgeting for
Marketing Activities
Budgets will incorporate ECM activities as potential revenues and cost savings. Carbon trading activities could be considered a separate line of business.
Strategic Management Accounting
SMA Issue Carbon Management Impact
Product Marketing Strategies
The Product Portfolio (BCG) Matrix
Star products will have high market share and high market growth opportunities in industries with better long-term carbon sustainable prospects.
New Product Development (NPD)
Designing products and services to meet carbon emission targets and marketing them as such
Product
Abandonment
Product Review Teams to consider carbon footprint in addition to profitability targets
Inflation The passing on of mandatory carbon costs and taxes as higher prices to consumers will cause inflation.
Packaging Consideration given to carbon footprint of packaging, in terms of functionalism, convenience, recyclability and also image.
After-Sales Service The carbon emission in terms of materials, labor and overhead of undertaking work due to meeting warranties and other after sales services should be costed into the product
Strategic Management Accounting
SMA Issue Carbon Management Impact
Pricing Strategy
Pricing Analysis Carbon costs, carbon related competitor activity and the value of low-carbon footprint products to carbon conscious customers should be considered in such analyses
Elasticity of Demand The impact on demand due to changes in prices if carbon costs are incorporated.
Skimming Selling to high carbon conscious customers willing to pay a price well above costs
Penetration Absorbing carbon costs of products and services sold to low carbon conscious customers to develop brand awareness. Productivity improvements can only be obtained either by lowering costs via ECM or changing customer carbon consciousness levels.
Strategic Management Accounting
SMA Issue Carbon Management Impact
International Business Strategy
Exporting vs. International Operations
Carbon costs can be reduced via Joint Implementation (JI) and Clean Development Mechanism (CDM) investments as per the Kyoto protocol
Price Differentials
and Carbon Dumping
Competing with countries that do not have carbon costs. Influencing government policy to impose countervailing carbon taxes.
Hedging Policies Ensuring that carbon credits in the overseas country is not devalued in terms of the parent country carbon credit pricing.
Strategic Management Accounting
SMA Issue Carbon Management Impact
Promotional Strategy
Promotional "Pull" Strategy (via Advertising etc.)
An Integrated Marketing Communication (IMC) approach should be taken to promote how the product or service is reducing carbon footprint, e.g. via purchasing carbon offsets.
Promotional "Push" Strategy( via Sales
Force)
Sales Force budgets, targets and incentive schemes geared towards extolling the attributes and pushing low carbon impact products. Traveling times on sales calls minimized to reduce carbon emissions. Bio-fuel cars used as sales vehicles.
Sales Response Functions
Response of sales volume to carbon related promotions tracked.
Media Selection
Strategies
Electronic media given higher priority to print media in order to reduce paper usage
Strategic Management Accounting
SMA Issue Carbon Management Impact
Supply Chain Strategies
Product-Distance Carbon emission measurements in terms of Product-Distance. The longer the distance and the more players in the channels of distribution the higher is the carbon costs.
The Level of Service The Service - Cost Trade-off ( for the right product gets to the right place at the right time, should consider the carbon emissions required to provide this level of service.
Distribution Cost
Accounting
Computation of carbon related costs in order processing, warehousing, transportation, and inventory control.
Transportation and
Simplex Models.
The use of these models to reduce transportation time and resulting reduction in carbon emissions.
Channel Control Consideration of the motivation, relationships and conflict issues that arise when channels are asked to on-sell products and services using ECM approaches themselves
Channel Adaptability Consideration of the adaptability of channels to changes in product-markets as a result of reducing carbon footprint.
Distribution Cost Control
Using ratio analysis to ensure that economic analysis, and ECM in supply chain activities are both evaluated.
Strategic Management Accounting
SMA Issue Carbon Management Impact
Performance Evaluation
Strategic Financial Structures (Gearing)
Consideration if carbon related investments should be financed via debt or equity. Ability to obtain shareholder and debt holder funding at favorable rates due to the use of such financing in ECM activities.
Weighted Average Cost of Capital
(WACC)
Calculating an organization’s carbon related Cost of Equity and Debt to calculate its overall Carbon-WACC. The equity and debt markets may value discount carbon intensive businesses (causing high financing costs) and place a value-premium on low carbon emitting businesses (causing low financing costs).
Corporate Performance
Perspectives
ROI used to evaluate ECM performance. If carbon related revenues and costs can be isolated as a separate line of business, this will enhance the evaluation.
Strategic Value Analysis
Calculation of value enhancement (or diminution) due to strategies relating to carbon related investments and operations
Valuing Strategic Investments
Valuation premium given to investments in ECM, such as investments in alternative energy assets and abatement activities (e.g.wind, biomass, solar, geothermal, nuclear)
Strategic Management Accounting
SMA Issue Carbon Management Impact
Performance Evaluation (Cont).
Valuing Strategic Operations
These include operational adjustments to incumbent assets, changes to energy prices, efficiencies in waste management, purchasing and sale of carbon credits and carbon related taxation.
Free Cash Flows Net Cash flows generated by carbon related activities less investments in carbon related non-current and current assets
The Business Value
The Net Present Value of expected future cash flows generated by strategic investments and operations in carbon related business.
The Balanced
Scorecard
Corporate Report Card to incorporate financial and non-financial KPIs with carbon focus. This could in addition to, or incorporated within the customer, innovation, internal business processes and financial focus.
Economic Value Added (EVA)
A charge against revenue is made for the cost of investments in carbon efficient assets. A separate Carbon-EVA can be calculated if carbon related net-income, investments and cost of capital can be isolated.
Strategic Management Accounting
Carbon Trading Scandals
– An Australian Department of Climate Change (2008)policy paper states that properly qualified external
auditors are needed, and must possess educational or professional qualifications in a relevant discipline.
– What is a ‘relevant discipline’ is not defined in the
policy paper, and could cover specialist knowledge in a wide range of disciplines including:
• environmental law,
• environmental science
• bio-chemistry and
• financial statement auditing (most likely)
Professional Qualifications
– Clearly, therefore, the use of experts is encouraged in
the policy paper (Department of Climate Change, 2008).
– One of the reasons for setting up the ICCAA is to provide
an integrated education program to Train and Certify
such Experts.
The ICCAA
Resolution • The School of Commerce can save the world!!!!
• Carbon Management Accountants…the new breed of CMAs…will save the World!