The concept of carbon credits for manufacturers originated with the Kyoto Agreement of 1997. As a means of combating global warming, signers of the agreement consented to limiting their carbon emissions to a predetermined amount. When businesses reach or surpass these goals, the agreement awards them carbon credits that can be sold to other companies who do not meet their goals. In this way, carbon credits can be like money in the bank for manufacturers willing participate in the program.
The premise behind carbon credits is that carbon dioxide released into the atmosphere creates climate change by warming the earth’s surface. The award-winning documentary, “An Inconvenient Truth,” details the potentially catastrophic effects of global warming that include the melting of the polar icecaps, a rise in ocean levels, and widespread flooding of coastal cities such as New York City, Los Angeles, and San Francisco.
When a business eliminates one ton of carbon emissions from its manufacturing process, it receives a carbon credit as a reward for its reduction. Companies that don’t reduce their carbon dioxide emissions have to buy carbon credits from businesses that do, making it profitable to be environmental. The prospective challenge is to cut global warming emissions by 60% by the year 2050.
Kyoto set two prerequisites for businesses dealing in carbon credits:
- Businesses must be in a country that signed Kyoto. Carbon credits come under the Kyoto Clean Development Mechanism (CDM).
- Businesses need to register with the United Nations before they can sell their carbon credits to other businesses on the international market.
Because the United States is not part of Kyoto Agreement, U.S. manufacturers participate in the carbon credit market on a voluntary basis, the reason being they believe that in the future they will be required to participate in the carbon credit program. By beginning now, manufacturers with high emissions lock in a lower price for carbon credits that are sure to cost more as more companies buy and sell credits. Also, these manufacturers are fostering good public relations by showing their customers that they have a concern for the future of our planet. A downside to participation is that polluting businesses outside the U.S. have no interest in buying credits from U.S. manufacturers. However, that situation could change at any time with the U.S. signing the Kyoto Agreement.
When entering the carbon credit market, the first step a manufacturer needs to take is calculating its “carbon footprint.” In this case, the carbon footprint refers to the amount of carbon dioxide that the manufacturing process emits into the atmosphere. Every product, from shoes to automobiles, has a different carbon footprint.
Manufacturing plants that run on gas, oil, and coal top the list in their emission atmosphere pollutants. Also, plants that produce cement, steel, textiles, air-conditions, refrigeration units, and fertilizers release methane, nitrous oxide, and hydroflurocarbons, all of which are highly toxic. These companies receive emission caps that force them to adapt emission reduction measures. If they reduce their emissions, they get carbon credits that they can sell to other manufacturers. If they don’t reduce their emissions, they are penalized and must buy carbon credits in order to reach their emission cap.
Much like commodities such as oil and soybeans, carbon credits are traded on an exchange. One of the largest of these voluntary exchanges is the Chicago Climate Exchange. Using CCX protocols developed by the World Business Council for Sustainable Development, the Chicago Climate Exchange oversees the carbon credits traded on the exchange. Manufacturers report their emissions on an annual basis, and these reports are subject to verification by an outside auditor, such as the NASD.
One company that has benefited from the carbon credit program is Nike. It has sold emission reduction credits equaling 100,000 tons to the utility company Entergy. Besides Nike, Entergy has purchased carbon credits from DuPont and Shell. Other businesses that have started to deal in carbon credits include Expedia, Whole Foods, and Haynes International, Inc.
Over time, at least some of the constraints on large companies are bound to filter down to smaller suppliers, so it’s important to understand the big picture when making decisions that may affect your company’s carbon footprint. |
