Project Risk and Carbon Emissions

 

We all know that there are external factors that affect our projects.  Regulations are one of those factors that have to be considered by the project manager.  Depending on what industry you are in, has a lot to do with what factors we need to consider.   Because of their nature, some industries are more susceptible to risks from regulations than others.

The U.S. energy industry (I am concentrating on the U.S. by it is more global than that) is one of those industries that seem to be at the whim of congress.  Perhaps whim is too severe of a word to use, but it certainly seems appropriate when one considers that energy production and usage is a political hot potato.  Tightly control it, loosen the controls, supplement and reward alternate energy use, expire alternate use incentives, all of these approaches make it difficult to access project risk when energy is a component. 

The most recent event to affect project risk is the new U.S. Environmental Protection Agency (EPA) limits on green-house gas production and the different ways to mitigate the effect.  The elephant in the room, for energy production, here is coal.  According to the U.S. Energy Information Administration, coal is used to generate 39% of our electrical needs.  Natural gas is second with 27%, followed by nuclear (19%), renewable, including hydro-electric (13%) and petroleum (1%).    The EPA is proposing a cap on carbon emissions; reducing 2005 levels by an average of 25% by 2020 and 30% by 2030. It also gives credits to those states and utilities already working to reduce carbon emissions. 

As with most of government regulations, the green-house reduction proposal is so complicated that it will take some time for utility companies to sort is all out.  Talk about increasing risk.  If stakeholder expectations (U.S. EPA in this instance) are not well understood, then what kind of risk management plan can be put into place?  Let’s look at two possible mitigation strategies for this issue.

Cap and Trade Policies

Here is the best explanation I could find and it comes from the EPA.

Cap and trade is a market-based policy tool for protecting human health and the environment by controlling large amounts of emissions from a group of sources. A cap and trade program first sets an aggressive cap, or maximum limit, on emissions. Sources covered by the program then receive authorizations to emit in the form of emissions allowances, with the total amount of allowances limited by the cap. Each source can design its own compliance strategy to meet the overall reduction requirement, including the sale or purchase of allowances, installation of pollution controls, and implementation of efficiency measures, among other options. Individual control requirements are not specified under a cap and trade program, but each emission source must surrender allowances equal to its actual emissions in order to comply. Sources must also completely and accurately measure and report all emissions in a timely manner to guarantee that the overall cap is achieved.

A well-designed cap and trade program delivers:

• Greater environmental protection at lower cost
• Broad regional reductions, facilitating state efforts to address local impacts
• Early reductions, a result of allowance banking and market incentives
• Environmental integrity and transparent operations and results
• Fewer administrative costs to government and industry
• Efficiency and innovation incentives
• Incentives for doing better and consequences for doing worse
• Accounting for all emissions
• Partnership with existing requirements to ensure protection of the local population and environment

To summarize the intent, cap and trade is not meant to allow a particular company to continue to emit significant levels of GHGs in perpetuity.   It is temporary measure to allow companies to minimize the effects of their emissions by “averaging them out” while working to permanently to improve the quality of their emissions.  Further information can be found at http://www.epa.gov/captrade/basic-info.html.

Carbon Taxes

For a comprehensive explanation of carbon taxes, I looked “down under” to Australia’s policy. From (http://www.carbontax.net.au/what-is-the-carbon-tax/), “At the centre of the government’s policy on climate change is pricing carbon. Many commentators and politicians have referred to this as a “carbon tax”. The idea is that polluters will pay per tonne of carbon they release into the atmosphere. This cost will initially be set at $23, and increase gradually until 2015, when we will shift to a trading scheme that will let the market set the cost. This is widely thought of as the most effective and least costly mechanism to reduce carbon output and reduce the level of climate change that is occurring. 

Right now, when you purchase a product that relies on carbon-intensive materials or manufacturing processes, the price you pay does not represent the cost incurred by the environment. The iron ore used to create the product could be sourced from the highest polluting mine in the world, the electricity used to power the manufacturing plant could be provided by the dirtiest coal mine in the world, and the trucks used to transport the product to its final destination in a supermarket could run on the dirtiest fuels in the world, and it would make no difference to the price. With a price on carbon, this equation would change. The amount of carbon pollution involved in producing a product would start to be factored into its final price. Products produced through dirty processes will become more expensive, thereby making it possible for other products produced through cleaner processes to compete on price.

Yes, that’s right. The price of certain goods that are reliant on carbon pollution for their production will go up. However, the majority of Australians will be compensated for this cost, and this cost will be relatively small for most items.

How will this drive a move towards a cleaner future you might wonder.  Well, it’s not hard to see that if pollution-intensive processes make goods more expensive, companies will look to reduce their pollution footprint in order to lower their costs. That’s what businesses do – improve efficiency year on year. It’s one of the key drivers of growth. For this reason, it is actually not necessary for the consuming public to change their practices, although that would help drive you own costs down.”

Project risk needs to consider sustainability to cover all their bases.  One of our founding and guiding principles says it best.  “Project Managers must first understand (all) the green (sustainability) aspects of their projects, knowing that this will better equip them to identify, manage, and respond to project risks.”