The Global Carbon Crisis

Emerging Carbon Constraints and Strategic Management Options

Timo Busch,Paul Shrivastava

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351278188
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

For at least a decade the science of climate change has warned us of the dire need for action – particularly by corporations who are the main engines of economic production and consumption. Yet managerial and corporate understanding of climate change and related energy issues remains fragmented and present actions lack the urgency this critical problem deserves. There is a whole new economy – the low-carbon economy – looming on the horizon. But our consumption and production patterns remain in a carbon-locked position. What we are risking is a global carbon crisis and a case of history repeating. Humankind's failure to adequately recognise the onset of and address the effects of the global financial crisis mirrors our similar failures with the carbon crisis. There are many parallels: both are and were predictable and both will have direct implications on humanity on a sweeping, indiscriminate and severe scale. The difference is that we cannot reverse the effects of climate change and fossil fuel scarcity as easily as we can repair the global financial system. It is of paramount importance that we wake up to the risks and begin tackling the issues early enough. To successfully address the risks, business needs to be aware of the consequences that a changing climate and finite carbon resources will have on their business performance. The element carbon – both as a resource and as an emission – is both an economic threat as well as an opportunity for companies. It is a threat for carbon-intense production systems that will need to be changed to avoid further harmful climatic change, and take into account the limited availability of carbon-based fuels. At the same time, new opportunities will emerge for companies who can creatively design and produce goods and services that fit the new emerging carbon-constrained business environment. Many sectors of the economy – for example, renewable energy, energy and resources conservation, waste reduction and management, carbon finance markets – will expand rapidly, as other carbon- and resource-intensive sectors decline. The Global Carbon Crisis succinctly translates important insights from the natural sciences, economics and equity discussions, for the business reader. It reviews important aspects of these discussions and clarifies misunderstandings with respect to climate change and fossil fuel availability and their implications for business. The book provides simple, direct, pragmatic and effective solutions that policy-makers and corporate managers can implement. The aim is to provoke action – thoughtful action – towards developing a low-carbon future for companies on three levels. At the macro level, the authors discuss the importance of tough industrial policies for climate change and propose the idea of an international carbon-equal fund. At the meso level, they elaborate on the role of inter-firm collaborations for establishing low-carbon industries and production systems. At the micro level, they illustrate the virtue of proactive carbon strategies and suggest a corporate carbon management framework. Getting the message of the carbon crisis across to a business audience has proved challenging. This book successfully makes the case that they are intricately connected to one another and practising managers and business students will benefit from viewing the carbon crisis in parallel to the financial meltdown. The book will be essential reading for all businesses grappling with carbon-related issues and for many in academia, including those in management, strategy, finance, corporate social responsibility and sustainable development, globalisation and innovation studies.

Part I
A strategic view of carbon constraints

1
The two sides of the carbon coin

Carbon is a basic element of life on Earth. It is the most abundant element, one on which many life systems depend, and a primary source of energy (fossil fuels). Today carbon is in huge turmoil—humans are on their way to creating a global carbon crisis. Eons of stable transformation and retransformation of carbon on Earth are now being destabilized by anthropogenic activities. Large human populations, their habitats, production and consumption processes are leading to a significant overuse of the element carbon. Excessive use of non-renewable, carbon-based fuels has caused excessive emissions of carbon dioxide into the Earth’s atmosphere.

The phenomenon of high crude oil and gas prices coupled with the prevailing public and scientific debate about climate change have one thing in common: both center on carbon. Despite carbon abundance in the atmosphere as carbon dioxide, there are limited resources of it in its useable form for fossil fuels. In other words, carbon is accumulating in the wrong forms and in the wrong place. Historically, carbon naturally accumulated in the ground in great quantities over geologic timescales; now, however, this quantity is being transferred to the atmosphere in a comparatively short time period. This ongoing process has accelerated, and as such contributes to the emergence of a new industrial crisis (Shrivastava et al. 1988): the global carbon crisis.

Overcoming the dependency on fossil fuels and significantly reducing greenhouse gas emissions has been recognized as one of the major challenges of the 21st century. However, global energy consumption continues to expand. A United Nations (UN 2007) report estimates that there has been an increase of 20 percent since 1990. Although progress has been achieved in developing and using cleaner energy technologies, the majority of current energy sources remain carbon-based. The amount of fossil-fuel-based energy consumption dropped in OECD countries from 94 percent in 1960 to 81 percent in 2009, while at the same time the total energy use almost tripled.¹ Today, energy from established renewable energy sources, such as hydropower and biofuels, accounts for only about 12 percent of total energy consumption, whereas newer technologies relying on wind, solar, wave, and geothermal energy account for only 0.5 percent of total energy consumption (UN 2007). Nevertheless, it is particularly important to recognize the possible strategies at hand in order to prevent a full-blown carbon crisis, as was the case with the global financial crisis; thus it is important to start managing carbon strategically and with foresight. This holds for policy makers and firms, as well as individual consumers—everyone has his or her stake in the emerging global carbon crisis.

This book stresses the role of firms and industrial production processes in the context of the carbon crisis. Both entities represent a fundamental portion of the carbon dilemma while simultaneously are most affected by its emerging constraints. We argue that managers need to be aware of the relevance of an emerging carbon crisis for their business environment and that proactive responses to this crisis are urgently required, from a business standpoint (Lovins et al. 2005; Stern 2006) as well as in terms of social responsibility (UNDP 2007). Notably, we stress that climate change and dependency on fossil fuels are related business topics that need to be managed simultaneously. When intensifying efforts to prevent a potential climate collapse, the adverse effects stemming from mismanaging fossil fuels can be preempted at the same time. Companies and their value chains are implicated in climate processes through their products, production systems, logistical systems, and consumption of energy and natural resources. As a result, every industry and company is exposed to climate change risks, though to different degrees and intensities. At the same time, companies also face strategic business opportunities arising from the necessary reconstruction of our economies towards a low-carbon system. By proactively addressing climate change challenges, companies can mitigate risks and gain competitive advantages. To do so, there are three core elements, which this book successively explores: (1) understanding carbon-induced changes in the business environment; (2) identifying the key issues and challenges ahead; and (3) illustrating strategic options in order to manage the issues adequately and effectively.

The first part of the book looks at carbon- and climate-related changes in the business environment. For corporate management, recognizing this change is pertinent especially in cases involving managerial decisions with long-term implications. It is an important first step towards acknowledging that the business environment is shifting towards a low-carbon society. Although this shift has created new risks for corporate management, it has also generated new low-carbon business opportunities, especially in the long run. To seriously consider carbon-induced risks and opportunities in one’s business there must be substantive redefinition of strategic management thinking: seemingly well-established business structures need to be revised and new business models need to be explored systematically.

The second part of the book identifies sources of emerging carbon constraints and elaborates on the likely consequences of a global carbon crisis. Current reporting in the media about climate change points towards the dominance of two contrasting positions: skeptical analyses that question the general validity of climate change as a scientifically proven effect; and exaggerations that climate change will have devastating and dramatic consequences for humanity and the entire planet. Both of these positions are misleading because they undermine the scientific integrity of a very sound and valid natural phenomenon, climate change, which we will elaborate on in more detail in the second part. However, as a consequence of prevailing differences on this topic, managers are often faced with difficulty in deciding what sources of information are trustworthy and credible. Generally, it is important to distinguish between two basic positions in this context: a position that legitimately understands the basic scientific foundation and proposes concrete and implementable mitigation and/or adaptation measures for addressing climate change; and a position that embellishes or tries to vilify climate change science in the media. Managers need to be aware of these positions and cautious about unreliable sources.

Therefore, providing insights into the basic scientific foundation and opting for enhanced transparency on the carbon challenge ahead is especially important. In the ecology literature, there have been several efforts to make the public aware of the basic scientific processes that govern our natural environment and the ecological challenges that lie ahead. Scholars concerned about the natural environment such as Kenneth Boulding, Donella and Dennis Meadows, and Herman Daly published their analyses in the early ’70s. They highlighted the fact that humanity faced natural limits to growth. Table 1 summarizes their main contributions. Although their concepts and models were correct on a theoretical basis, critics have pointed out that their warnings were premature and exaggerated given that future technologies temporarily solved some of the problems of growth. In fact, the doomsday scenarios that were put forward did not materialize. Nevertheless, these early studies inspired many more investigations in the realm of human-ecology systems and developments of corresponding concepts. One of the most recent studies was initiated by the G8 and five major developing countries. The main premise of the study entitled “The Economics of Ecosystems and Biodiversity” is that all businesses depend on biodiversity and ecosystem services (TEEB 2010). As such, the natural environment impacts businesses in both positive and negative ways and it is important to measure and quantify these impacts. In the second part of this book, we illustrate how the carbon and climate change issues, covered by past literature on potential ecological collapse, have been more accurate than

Table 1 Overview of important contributions in the literature on ecological limits and crises

Kenneth Boulding (1966) The Economics of the Coming Spaceship Earth	The Earth of the future requires a shift in principles considering the world no longer as an open but as a closed economy The open economy can be considered as a "cowboy" economy, the cowboy being associated with the unlimited plains and also with reckless, exploitative, romantic, and violent behavior The closed economy can be considered as a "spaceman" economy, in which the Earth has become a single spaceship, without unlimited reservoirs for extraction or for pollution, and in which cyclical ecological systems are important
Dennis Meadows etal. {1972) The Limits to Growth	Very little attention had been paid to the environmental consequences of economic growth. That will have to change in the future owing to limitations to growth The world economy is represented as a single economy. Five major interconnected trends between that economy and its environment are investigated: accelerating industrialization, rapid population growth, widespread malnutrition, depletion of non-renewable resources, and deteriorating natural environment With a system dynamics model the authors showed that growth patterns of the past cannot be extended into the future
Herman Daly (1973) Toward a Steady-State Economy	A steady-state economy is defined by constant stock of physical wealth (artifacts) and a constant population, each maintained at some chosen, desirable level by a low rate of throughput The throughput is the inevitable cost of maintaining the stocks of people and artifacts and should be minimized subject to the maintenance of a chosen level of stocks. The throughput is controlled at its input (depletion) rather than at the pollution end Progress in the steady state consists in increasing ultimate efficiency (= service/throughput) by maintaining the stock with less throughput or getting more service per unit of time from the same stock

Source: Boulding 1966; Meadows et al. 1972; Daly 1973

previously anticipated and economists have now started to calculate the corresponding costs to society. We elaborate on how a global carbon crisis is now unfolding which will negatively affect businesses, prompting urgent action to mitigate these impacts.

In the third part of the book we illustrate strategic options that, if adequately managed, may help to prevent a global carbon crisis. We suggest two key mechanisms for an accelerated path towards a low-carbon society: adequate political enforcements on the macro (societal) level; and voluntary carbon reduction initiatives on the meso (inter-organizational) level and micro (firm) level. These management options target two key technological challenges: the relationship between economic growth and energy demand; and the level of carbonization in the energy mix. To explain the logic behind this we refer to the famous equation by Ehrlich and Holdren (1971):

Impact = Population × Consumption × Technology

Following this formula, any potential impact of human beings on the ecological system can be explained by a function of the number of people living on the Earth, the per capita consumption, and the technology used to produce goods and services. The implications of this equation are illustrated in the greenhouse gases reduction target formulated by the European Union and the G8 in July 2009. The objective is that developed nations should pursue cuts of greenhouse gases of at least 80 percent below 1990 levels by 2050 (ECF 2010). In other words the impact in 2050—measured in terms of the carbon loading in the environment—shall only be about onefifth of the 1990 level. Next, let us follow the majority of the population forecasts and assume that in 2050 the world population will be about nine billion, compared with six billion at the start of the century. This is a 50 percent increase in population. The average consumption per capita can be displayed by the gross domestic product (GDP) per capita. Let’s assume there is an annual gross domestic product increase rate of 1.5 percent. This roughly corresponds to a doubling of gross domestic product by 2050. Applying the Ehrlich and Holdren formula delivers the following results: maintaining the current ecological impact (i.e. the current level of greenhouse gases) will require technological improvements of a factor of three. Meeting the European Union’s goal of reductions of 80 percent from the 1990 level of greenhouse gases (GHG) will require technological improvements by a factor of 15. To illustrate these technological challenges further, we can extend the original equation in the carbon context (also referred to as the “Kaya identity,” coined by the Japanese energy economist Yoichi Kaya):

GHG = Population × GDP/Population × Energy/GDP × GHG/Energy

It is important to emphasize that this equation is not a math function in terms of an increa...