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Green Finance and Sustainability: Environmentally-Aware Business Models and Technologies Zongwei Luo University of Hong Kong, HK

Senior Editorial Director: Director of Book Publications: Editorial Director: Acquisitions Editor: Development Editor: Production Coordinator: Typesetters: Cover Design:

Kristin Klinger Julia Mosemann Lindsay Johnston Erika Carter Joel Gamon Jamie Snavely Keith Glazewski and Natalie Pronio Nick Newcomer

Published in the United States of America by Business Science Reference (an imprint of IGI Global) 701 E. Chocolate Avenue Hershey PA 17033 Tel: 717-533-8845 Fax: 717-533-8661 E-mail: [email protected] Web site: http://www.igi-global.com/reference Copyright © 2011 by IGI Global. All rights reserved. No part of this publication may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this set are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI Global of the trademark or registered trademark.

Library of Congress Cataloging-in-Publication Data

Green finance and sustainability: environmentally-aware business models and technologies / Zongwei Luo, editor. p. cm. Includes bibliographical references and index. Summary: “This book is devoted to examining a range of issues concerning green finance and sustainability covering sections on emerging environmentally aware business models, regulation and standard development, green ICT for sustainability, green finance and the carbon market, green manufacturing, logistics and SCM, and regional low carbon development”--Provided by publisher. ISBN 978-1-60960-531-5 (hbk.) -- ISBN 978-1-60960-532-2 (ebook) 1. Industrial management--Environmental aspects. 2. Sustainable development-Environmental aspects. 3. Industries--Environmental aspects. 4. Finance-Environmental aspects. I. Luo, Zongwei, 1971HD30.255.G736 2011 658.4’083--dc22 2010054427

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the authors, but not necessarily of the publisher.

List of Reviewers Jose Humberto Ablanedo Rosas, University of Texas at El Paso, USA Evon Abu-Taieh, Arab Academy for Banking and Financial Sciences, Jordan Mohammad M Amini, The University of Memphis, USA Frank Arendt, ISL Institute of Shipping Economics and Logistics, Germany Ezendu Ariwa, London Metropolitan University, UK Gildas Avoine, Université catholique de Louvain, Belgium Indranil Bose, University of Hong Kong, Hong Kong Miguel Gastón Cedillo-Campos, Supply Chain Research and Development Center, Mexico Naoufel Cheikhrouhou, Ecole Polytechnique Fedrale de Lausanne, Switzerland Weiping Chen, Virginia Tech, USA Paul Chou, IBM Thomas J. Watson Research Center, USA Kim Seung Chul, Hanyang University, Korea Christophe Claramunt, Naval Academy Research Institute, France Arianna D’Ulizia, IRPPS, Italy Fragniere Emmanuel, Haute Ecole de Gestion de Genève, Switzerland Yulian Fei, Zhejiang Gongshang University, China Samuel Fosso Wamba, University of Wollongong, Australia GR Gangadharan, Novay, The Netherlands Xin Guo, University of California - Berkeley, USA Byung-In Kim, Pohang University of Science and Technology (POSTECH), Korea Sheung-Kown Kim, Korea University, Korea Danuta Kisperska-Moron, Karol Adamiecki University of Economics, Poland Senthil Kumar, CMS College of Science and Commerce, India Andrew Lim, City University of Hong Kong, Hong Kong Chad Lin, Curtin University of Technology, Australia Miao Lixing, Tsinghua University, China Dubosson Magali, Haute Ecole de Gestion de Genève, Switzerland Sanjay Misra, Atilim University, Turkey Shima Mohebbi, K.N.Toosi University of Technology, Iran Zhang Mun, Shenzhen-Jinan University, China Malgorzata Pankowska, University of Economics, Poland Hennariina Pulli, University of Turku, Finland

Jasenka Rakas, University of California Berkley, USA Venky N. Shankar, Pennsylvania State University, USA Jun Shu, Pennsylvania State University, USA Ulla Tapaninen, University of Turku, Finland Amy J.C. Trappey, National Taipei University of Technology, Taiwan Bikem Türkeli, Isik University, Turkey David Walters, University of Sydney, Australia John R. Williams, Massachusetts Institute of Technology, USA Farouk Yalaoui, UTT, France Benjamin Yen, University of Hong Kong, Hong Kong Banu Yuksel Ozkaya, Hacettepe University, Turkey Guoqing Zhang, University of Windsor, Canada Chen Zhou, Georgia Institute of Technology, USA

Table of Contents

Preface . .............................................................................................................................................xviii Section 1 Business Models, Regulation and Standard for Sustainability Chapter 1 Towards the Transition to a Post-Carbon Society: The Crisis of Existing Business Models?................. 1 Sophie Galharret, Expert on Energy and Climate Issues, France Laurent Beduneau Wang, Expert on Strategy & Transformation of Business Model and Financial System Issues, France Chapter 2 Environmental Standardization for Sustainability................................................................................. 31 John W. Bagby, Pennsylvania State University, USA Chapter 3 Promoting Technological Environmental Innovations: What is the Role of Environmental Regulation?............................................................................................................................................ 56 Jacqueline C. K. Lam, The University of Hong Kong, Hong Kong Peter Hills, The University of Hong Kong, Hong Kong Chapter 4 Quantifying Sustainability: Methodology for and Determinants of an Environmental Sustainability Index............................................................................................................................... 74 Kobi Abayomi, Georgia Institute of Technology, USA Victor de la Pena, Columbia University, USA Upmanu Lall, Columbia University, USA Marc Levy, CIESIN at Columbia University, USA

Section 2 Green ICT for Sustainability Chapter 5 Greener Data Centres in the Netherlands............................................................................................... 91 Theo Thiadens, Fontys University of Applied Sciences, The Netherlands Marko Dorenbos, Fontys University of Applied Sciences, The Netherlands Andries Kasper, Fontys University of Applied Sciences, The Netherlands Anda Counoutte-Potman, Open University, The Netherlands Chapter 6 Information Technology Resources Virtualization for Sustainable Development............................... 110 Malgorzata Pankowska, University of Economics in Katowice, Poland Chapter 7 An Introduction to the Green IT Balanced Scorecard as a Strategic IT Management System............ 126 Yulia Wati, Chosun University, South Korea Chulmo Koo, Chosun University, South Korea Chapter 8 A New Recommendation for Green IT Strategies: A Resource-Based Perspective............................ 153 Yulia Wati, Chosun University, South Korea Chulmo Koo, Chosun University, South Korea Chapter 9 Information and Communication Technologies (ICT) in Building Knowledge Processes in Vulnerable Ecosystems: A Case for Sustainability.............................................................................. 176 Prakash Rao, Symbiosis International University, India Chapter 10 MSP430 Microcontroller: A Green Technology.................................................................................. 191 Mala Mitra, PES School of Engineering, India Chapter 11 Toward a Conceptual Model for Sustainability and Greening through Information Technology Management..................................................................................................................... 199 A.T. Jarmoszko, Central Connecticut State University, USA Marianne D’Onofrio, Central Connecticut State University, USA Joo Eng Lee-Partridge, Central Connecticut State University, USA Olga Petkova, Central Connecticut State University, USA

Section 3 Green Finance and Carbon Market Chapter 12 Price Relationships in the EU Emissions Trading System.................................................................. 212 Julien Chevallier, Université Paris Dauphine, France Chapter 13 Carbon as an Emerging Tool for Risk Management............................................................................ 221 Tenke A. Zoltáni, Islan Asset Management, Switzerland Chapter 14 Voluntary Emissions Reduction: Are We Making Progress?............................................................... 241 Robert Bailis, Yale University, USA Neda Arabshahi, Yale University, USA Chapter 15 GHG Emissions from the International Goods Movement by Ships and the Adaptation Funding Distribution............................................................................................................................ 274 Haifeng Wang, University of Delaware, USA Chapter 16 Emissions Trading at Work: The EU Emissions Trading Scheme and the Challenges for Large Scale Auctioning........................................................................................................................ 291 Bernd Mack, Deutsche Boerse, Germany Sabina Salkic, Deutsche Boerse, Germany Chapter 17 A Pragmatic Profile Approach to Evaluating Environmental Sustainability Investment Decisions.............................................................................................................................................. 321 Frank Lefley, University of London, UK Joseph Sarkis, Clark University, USA Section 4 Green Manufacturing, Logistics and SCM Chapter 18 Green Logistics: Global Practices and their Implementation in Emerging Markets........................... 334 Marcus Thiell, Universidad de los Andes, Colombia Juan Pablo Soto Zuluaga, Universidad de los Andes, Colombia Juan Pablo Madiedo Montañez, Universidad de los Andes, Colombia Bart van Hoof, Universidad de los Andes, Colombia

Chapter 19 The Impact of Sustainability-Focused Strategies on Sourcing Decisions........................................... 358 Ozan Özcan, University of South Florida, USA Kingsley Anthony Reeves Jr., University of South Florida, USA Chapter 20 Green Logistics and Supply Chain Management................................................................................. 387 Darren Prokop, University of Alaska Anchorage, USA Chapter 21 Greener Transportation Infrastructure: Theoretical Concepts for the Environmental Evaluation of Airports.......................................................................................................................... 394 Jean-Christophe Fann, Université Libre de Bruxelles, Belgium & University of California, Berkeley, USA Jasenka Rakas, University of California, Berkeley, USA Chapter 22 A Conceptual Model for Greening a Supply Chain through Greening of Suppliers and Green Innovation................................................................................................................................. 422 H. K. Chan, University of East Anglia, UK T.-Y. Chiou, University of East Anglia, UK F. Lettice, University of East Anglia, UK Chapter 23 An Environmentally Integrated Manufacturing Analysis Combined with Waste Management in a Car Battery Manufacturing Plant.................................................................................................. 436 Suat Kasap, Hacettepe University, Turkey Sibel Uludag Demirer, Villanova University, USA Sedef Ergün, Drogsan Pharmaceuticals, Turkey Section 5 Regional Development Chapter 24 The Impact of Electricity Market and Environmental Regulation on Carbon Capture & Storage (CCS) Development in China.............................................................................................................. 463 Zhao Ang, Freelance Researcher, Belgium Chapter 25 A Critical Assessment of Environmental Degeneration and Climate Change: A Multidimensional (Political, Economic, Security) Challenge for China’s Future Economic Development and its Global Reputation............................................................................. 472 Christian Ploberger, University of Birmingham, UK

Chapter 26 Study on Low-Carbon Economy Model and Method of Chinese Tourism Industry........................... 492 Zhang Mu, Jinan University, China Luo Jing, Jinan University, China Zhang Xiaohong, Jinan University, China Tang Lei, Jinan University, China Feng Xiao-na, Jinan University, China Chen Shan, Jinan University, China Chapter 27 Government Policies and Private Investments Make for a Bright Cleantech Future in India............. 526 Gavin Duke, Aloe Private Equity, UK Nidhi Tandon, Networked Intelligence for Development, Canada Chapter 28 Building a Sustainable Regional Eco System for Green Technologies: Case of Cellulosic Ethanol in Oregon................................................................................................................................ 535 Bob Greenlee, Cascade Microtech, USA Tugrul Daim, Portland State University, USA Compilation of References ............................................................................................................... 569 About the Contributors .................................................................................................................... 613 Index.................................................................................................................................................... 625

Detailed Table of Contents

Preface . .............................................................................................................................................xviii Section 1 Business Models, Regulation and Standard for Sustainability Chapter 1 Towards the Transition to a Post-Carbon Society: The Crisis of Existing Business Models?................. 1 Sophie Galharret, Expert on Energy and Climate Issues, France Laurent Beduneau Wang, Expert on Strategy & Transformation of Business Model and Financial System Issues, France This chapter provides a diagnosis of internal and external factors that will trigger incentives to reshape business models incorporating green considerations, on a basis of three sectors analysis (oil, car and outdoor sportswear industries). The authors are aiming at enlightening the way they conceive the transition and the challenges that remain for business transformations. Chapter 2 Environmental Standardization for Sustainability................................................................................. 31 John W. Bagby, Pennsylvania State University, USA This chapter reviews the role of standardization activities in setting environmental constraints, in the development of green technologies, and in establishing metrics for environmental certification and monitoring. The implications of managing environmental standardization to attract financing for sustainable business models are so significant that disregarding the risks of environmental standardization imperils competitiveness. Chapter 3 Promoting Technological Environmental Innovations: What is the Role of Environmental Regulation?............................................................................................................................................ 56 Jacqueline C. K. Lam, The University of Hong Kong, Hong Kong Peter Hills, The University of Hong Kong, Hong Kong

This chapter reviews and discusses the debate over the effectiveness of environmental regulation in promoting industrial Technological Environmental Innovation (TEI). Using the innovation-friendly regulatory principles adapted from Porter and van der Linde (1995a and 1995b), this chapter demonstrates how properly designed and implemented environmental regulation (TEI promoting regulation) has played a critical role in promoting TEI in the transport industry in California and Hong Kong. Chapter 4 Quantifying Sustainability: Methodology for and Determinants of an Environmental Sustainability Index............................................................................................................................... 74 Kobi Abayomi, Georgia Institute of Technology, USA Victor de la Pena, Columbia University, USA Upmanu Lall, Columbia University, USA Marc Levy, CIESIN at Columbia University, USA This chapter consider new methods of component extraction and identification for the Environmental Sustainability Index (ESI) – an aggregation of environmental variables created as a measure of overall progress towards environmental sustainability. Principally, the authors propose and illustrate a parametric version of Independent Component Analysis via Copulas (CICA). The CICA procedure yields a more coherent picture of the determinants of environmental sustainability. Section 2 Green ICT for Sustainability Chapter 5 Greener Data Centres in the Netherlands............................................................................................... 91 Theo Thiadens, Fontys University of Applied Sciences, The Netherlands Marko Dorenbos, Fontys University of Applied Sciences, The Netherlands Andries Kasper, Fontys University of Applied Sciences, The Netherlands Anda Counoutte-Potman, Open University, The Netherlands In this chapter, the current situation regarding green data centres in the Netherlands is mapped. The chapter successively goes through the entire chain of processes that are needed for arriving at greener data centres. The chapter starts with the legislators. It continues with the procurement of IT. It discusses the design of facilities required for a data centre and the ICT provisions as used by this data centre. It looks at the analysis of the degree of sustainability in data centres and the measures that need to be taken as a result of this. And it concludes by describing how ICT equipment could be recycled. Chapter 6 Information Technology Resources Virtualization for Sustainable Development............................... 110 Malgorzata Pankowska, University of Economics in Katowice, Poland The first part of the chapter includes presentation of benefits resulting from IT (Information Technology) resources virtualization, Grid computing and cloud computing development. The second part

contains a model of IT governance for sustainability. The main important factors included in the model concern IT strategy, business strategy, IT management, business agreements. Chapter 7 An Introduction to the Green IT Balanced Scorecard as a Strategic IT Management System............ 126 Yulia Wati, Chosun University, South Korea Chulmo Koo, Chosun University, South Korea This chapter introduces the Green IT Balanced Scorecard by incorporating an environmental aspect of technology into the scorecard measurement method. The authors conceptualized the Green IT balanced scorecard as “a nomological management tool to systematically align IT strategy with business strategy from an environmental sustainability perspective in order to achieve competitive advantage.” Chapter 8 A New Recommendation for Green IT Strategies: A Resource-Based Perspective............................ 153 Yulia Wati, Chosun University, South Korea Chulmo Koo, Chosun University, South Korea This chapter conceptualizes three different strategies: tactical green IT strategy, strategic proactive green IT strategy, and sustained green IT strategy, along with theory-based propositions for each of the strategies. The chapter also demonstrates that the Green IT strategy is path-dependent; that is to say, a firm’s prior experience and history helps determine its current strategies. This study also involves a discussion of the development of the theory, the proposed model, and some possible future research directions. Chapter 9 Information and Communication Technologies (ICT) in Building Knowledge Processes in Vulnerable Ecosystems: A Case for Sustainability.............................................................................. 176 Prakash Rao, Symbiosis International University, India The present chapter explores the use of some of the current state of the art technologies like ICTs including tools like Remote Sensing and GIS as a means for providing sound and efficient decision making across various sectors. Chapter 10 MSP430 Microcontroller: A Green Technology.................................................................................. 191 Mala Mitra, PES School of Engineering, India In this chapter, the architecture and function of a microcontroller, a device for system operation control at micro-level, is briefed. The need for a low power microcontroller towards sustainability and greening is stressed with various examples. The MSP430 Microcontroller, a product from Texas Instruments, is a very low power microcontroller.

Chapter 11 Toward a Conceptual Model for Sustainability and Greening through Information Technology Management..................................................................................................................... 199 A.T. Jarmoszko, Central Connecticut State University, USA Marianne D’Onofrio, Central Connecticut State University, USA Joo Eng Lee-Partridge, Central Connecticut State University, USA Olga Petkova, Central Connecticut State University, USA This study describes a conceptual approach to greening and sustainability through Information Technology management. The authors reviewed existing research and publications on the topic of greening, and concluded that while much has been written about ways to go green, much less are available on guidelines to help gauge the degree of greening efforts. Section 3 Green Finance and Carbon Market Chapter 12 Price Relationships in the EU Emissions Trading System.................................................................. 212 Julien Chevallier, Université Paris Dauphine, France This chapter details the idiosyncratic risks affecting each emissions market, be it in terms of regulatory uncertainty, economic activity, industrial structure, or the impact of other energy markets. Besides, based on a careful analysis of the EUA and CER price paths, this chapter assesses common risk factors by focusing more particularly on the role played by the CER import limit within the ETS. Chapter 13 Carbon as an Emerging Tool for Risk Management............................................................................ 221 Tenke A. Zoltáni, Islan Asset Management, Switzerland Since 2005, when the European Union Emissions Trading Scheme (EU ETS) launched, green adoption in business and industry has been marred by fraudulent carbon credits, VAT swindlers and carbon cowboys, inefficiencies of a nascent market, and not least of all by legislative uncertainty. The disrepute afforded by these examples hindered low carbon growth and deterred emerging business models from adopting more carbon friendly practices. Chapter 14 Voluntary Emissions Reduction: Are We Making Progress?............................................................... 241 Robert Bailis, Yale University, USA Neda Arabshahi, Yale University, USA To assess how voluntary emissions reduction programs have performed, this study examines the progress that C4C signatories have made. The results show widely dispersed GHG quantities and a range of reduction plans. Due to the lack of uniform, comparable data, the authors call for standardized, clearly defined carbon accounting guidelines as the first step towards effective corporate GHG management

Chapter 15 GHG Emissions from the International Goods Movement by Ships and the Adaptation Funding Distribution............................................................................................................................ 274 Haifeng Wang, University of Delaware, USA The GHG reduction from ships has attracted international attention. As the major transportation mode in international trade, how the reduction cost influences the international trade is becoming a major concern. How to allocate the funds collected from the emission regulation is also in controversy. This chapter summarizes the policy instruments under discussion in the International Maritime Organization and discusses the advantages of market based instruments. Chapter 16 Emissions Trading at Work: The EU Emissions Trading Scheme and the Challenges for Large Scale Auctioning........................................................................................................................ 291 Bernd Mack, Deutsche Boerse, Germany Sabina Salkic, Deutsche Boerse, Germany After introducing the foundations of cap-and-trade markets, the authors of this chapter confirm that the market architecture of the EU ETS is working and that secondary market trading is functioning. But they also illustrate frictions in price discovery and variability in pricing relations. This leads to the conclusion that efficiency and integrity of the emissions markets are particularly susceptible to institutional uncertainty and supply and demand constraints. Chapter 17 A Pragmatic Profile Approach to Evaluating Environmental Sustainability Investment Decisions.............................................................................................................................................. 321 Frank Lefley, University of London, UK Joseph Sarkis, Clark University, USA This chapter contends that environmental sustainability is a subject of great contemporary importance, but due to biases associated with traditional project appraisal approaches, projects that have strong environmental issues may be neglected. The chapter then presents a modified version of the pragmatic financial appraisal profile model by including an environmental assessment in the form of the ‘environmental score index.’ Section 4 Green Manufacturing, Logistics and SCM Chapter 18 Green Logistics: Global Practices and their Implementation in Emerging Markets........................... 334 Marcus Thiell, Universidad de los Andes, Colombia Juan Pablo Soto Zuluaga, Universidad de los Andes, Colombia Juan Pablo Madiedo Montañez, Universidad de los Andes, Colombia Bart van Hoof, Universidad de los Andes, Colombia

This chapter presents a global overview of green logistics practices at various management levels and the inherent challenges of their implementation in emerging markets. It begins by clarifying the terminology and describing its scope and characteristics, and it continues with an analysis of the impact of green logistics on the creation of economic and social value. Chapter 19 The Impact of Sustainability-Focused Strategies on Sourcing Decisions........................................... 358 Ozan Özcan, University of South Florida, USA Kingsley Anthony Reeves Jr., University of South Florida, USA This book chapter examines the relationship between the pursuit of a sustainability-focused corporate strategy and the level of vertical integration observed in organizations. The study makes two contributions. First, it develops the theoretical foundation for linking sustainability strategies to organizational structure. Second, it empirically examines the vertical integration level of 144 sustainability-focused companies in 9 different industries. Chapter 20 Green Logistics and Supply Chain Management................................................................................. 387 Darren Prokop, University of Alaska Anchorage, USA This chapter will discuss the role of logistics and supply chain management in the generation of such pollutants and examine methods to mitigate this byproduct of modern business activity. It will be shown that a series of trade-offs exist which are complex in nature and require careful consideration when confronting environmental concerns. Chapter 21 Greener Transportation Infrastructure: Theoretical Concepts for the Environmental Evaluation of Airports.......................................................................................................................... 394 Jean-Christophe Fann, Université Libre de Bruxelles, Belgium & University of California, Berkeley, USA Jasenka Rakas, University of California, Berkeley, USA The adoption of greener construction practices occurs mostly in the realm of building projects. Existing environmental evaluations are often generic, and hence, unable to manage the complexity of larger infrastructure systems such as airports. To respond to this need, the authors of this chapter developed the theoretical grounds for the evaluation of greener airport systems. Chapter 22 A Conceptual Model for Greening a Supply Chain through Greening of Suppliers and Green Innovation................................................................................................................................. 422 H. K. Chan, University of East Anglia, UK T.-Y. Chiou, University of East Anglia, UK F. Lettice, University of East Anglia, UK

Nowadays, more organisations are focusing on how to improve their environmental performance, partly driven by recent regulations in this area. This means that green supply chain management plays an important role over traditional supply chain management. Companies could gain competitive advantage through the proper management of their supply chain activities, for example, purchasing management. In fact, organisations can now generate more business opportunities than their competitors by addressing environmental management successfully. Chapter 23 An Environmentally Integrated Manufacturing Analysis Combined with Waste Management in a Car Battery Manufacturing Plant.................................................................................................. 436 Suat Kasap, Hacettepe University, Turkey Sibel Uludag Demirer, Villanova University, USA Sedef Ergün, Drogsan Pharmaceuticals, Turkey This chapter presents an environmentally integrated manufacturing system analysis for companies looking for the benefits of environmental management in achieving high productivity levels. When the relationship between environmental costs and manufacturing decisions is examined, it can be seen that the productivity of the company can be increased by using an environmentally integrated manufacturing system analysis methodology. Section 5 Regional Development Chapter 24 The Impact of Electricity Market and Environmental Regulation on Carbon Capture & Storage (CCS) Development in China.............................................................................................................. 463 Zhao Ang, Freelance Researcher, Belgium This chapter examines the impact of Chinese electricity market establishment and environmental regulatory institution on CCS. This chapter argues that Chinese government should protect Intellectual Property Right (IPR), liberalize electricity market, and enforce environmental regulation in order to harvest CCS benefits successfully. Chapter 25 A Critical Assessment of Environmental Degeneration and Climate Change: A Multidimensional (Political, Economic, Security) Challenge for China’s Future Economic Development and its Global Reputation............................................................................. 472 Christian Ploberger, University of Birmingham, UK China and its population are confronted with fundamental environmental challenges, as both environmental degeneration and the impact of climate change exhibit critical political, economic, and social implications for their future development. Among the various environmental challenges China faces, this chapter identifies pollution issues, soil erosion, acid rain, and sea-level rise.

Chapter 26 Study on Low-Carbon Economy Model and Method of Chinese Tourism Industry........................... 492 Zhang Mu, Jinan University, China Luo Jing, Jinan University, China Zhang Xiaohong, Jinan University, China Tang Lei, Jinan University, China Feng Xiao-na, Jinan University, China Chen Shan, Jinan University, China Recent years saw the global wave of new low-carbon economy, which is a new strategic measure to cope with global warming, and it has gained lots of concerns from many governments. As the representatives of developing countries, China is responsible for “common but distinguishing duty for global climate change.” Many policies have been made to develop low-carbon economy with the hope to advocate and innovate low-carbon economy in some industries and cities during these years. Chapter 27 Government Policies and Private Investments Make for a Bright Cleantech Future in India............. 526 Gavin Duke, Aloe Private Equity, UK Nidhi Tandon, Networked Intelligence for Development, Canada Written from the perspective of private equity investment, this chapter highlights the factors needed to support clean technology development, and in particular, the importance of an enabling policy environment. Drawing from the experience of a private equity fund that seeks out environmental companies and grows them into viable international enterprises, this chapter showcases examples in India whose bottom lines include social and environmental benefits for all. Chapter 28 Building a Sustainable Regional Eco System for Green Technologies: Case of Cellulosic Ethanol in Oregon................................................................................................................................ 535 Bob Greenlee, Cascade Microtech, USA Tugrul Daim, Portland State University, USA Increasing gasoline prices, concerns about energy security, and the effect of greenhouse gases on global warming are driving demand for alternative fuels such as ethanol and biodiesel. In the United States, corn is the major source of fuel ethanol, but there are disadvantages to using crops for fuel, including increasing costs and competition with food sources. Compilation of References ............................................................................................................... 569 About the Contributors .................................................................................................................... 613 Index.................................................................................................................................................... 625

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Preface

INTRODUCTION Green, or environmentally friendly, often refers to goods and services considered to inflict minimal or no harm on the environment. The world now is at the point to pursue a low carbon development roadmap that would eventually decouple economic growth from greenhouse gas and other polluting emissions, through technological and business innovations. Worldwide, the supply chain sector is among the top 3 largest carbon emission contributors. Supply chain management undoubtedly shall undertake the burden of facilitating this carbon emission reduction by pursuing a low carbon supply chain management practice. The unanimous global pursuit of a sustainable environment has called for advocating the grand challenge of low carbon supply chain management research for business and technology innovation to pave the foundation for a low carbon economy. Measurement of carbon emissions is broadly adopted as a proxy for quantifying damage to the environment. Low carbon SCM would play a major role in carbon reduction, thus promoting a long term sustainable economy development and well being. The branding value of low carbon development as well as the sustainable development methods would strengthen comparative advantages of environmentallyaware industries, supporting economic transformation by developing a technology rich, high value added, and service oriented, low carbon economy. Carbon competitiveness is already considered as the critical benchmark of national economic competition. Therefore, supply chain carbon competitiveness will absolutely redefine an economy’s competitive strength.

SUPPLY CHAIN CARBON MANAGEMENT With growing concern on environmental considerations in supply chain industries, numerous corporations are facing new challenge on carbon management in supply chains. A few of the global companies which provide management services are developing various tools of carbon management. Since carbon management would exert considerable impacts with changes on supply chain activities, effective tools become critical to illustrate and measure the carbon inter-dependencies and inter-impact among activities. For example, in the supply chain carbon management, it is inevitable to make changes on supply chain activities. Due to these activities having different connections or relationships with each other, some of them would lead to changes to the rest accordingly. In order to measure these changes, it would require tools to model and represent the inter-connection of activities, as well to calculate the impact to the rest

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if any activities would change. It is necessary to develop models to represent the inter-connections of supply chain activities and calculate the change impact of carbon intensity caused by carbon management.

CARBON IMPACT MANAGEMENT In supply chain carbon management, all activities could be considered competitive peers to each other, which mean each of them is wishing to fulfill their own objectives by proposing and insisting their demand for their benefit. Is it possible for each of them to reach the maximal total return at the same time? What is the carbon impact to the whole supply chain? These questions are frequently asked when those supply chain activities are owned or executed by different interested parties respectively. All of them are pursuing the maximal interest in this carbon constrained economy. If those activities are run by the same party, then not all activities are necessary to reach their biggest gain. It is natural to have a different priority to enforce the carbon impact to the activities in the supply chains when optimizing the carbon impact or de-carbonizing the whole chains. With the rapid development of carbon accounting technique, a computable tool for carbon impact analysis to supply chain management is becoming viable, although still with considerable barriers ahead.

ABOUT THIS BOOK This book is devoted to examining a range of major issues concerning green finance and sustainability to provide perspectives, clustered into five book sections on emerging environmentally aware business models, regulation and standard development, green ICT for sustainability, green finance and carbon market, green manufacturing, logistics and SCM, and regional low carbon development.

Section 1: Business Models, Regulation and Standard for Sustainability • • • •

Chapter 1: Towards the Transition to a Post-Carbon Society: The Crisis of Existing Business Models? Sophie Galharret, Laurent Beduneau Wang Chapter 2: Environmental Standardization for Sustainability, John W. Bagby Chapter 3: Promoting Technological Environmental Innovations: What is the Role of Environmental Regulation? Jacqueline C.K. Lam and Peter Hills Chapter 4: Quantifying Sustainability: Methodology for and Determinants of an Environmental Sustainability Index, Kobi Abayomi, Victor de la Pena, Upmanu Lall, Marc Levy

Section 2: Green ICT for Sustainability • •

Chapter 5: Greener Data Centres in the Netherlands, Theo Thiadens, Marko Dorenbos, Andries Kasper, Anda Counoutte-Potman Chapter 6: Information Technology Resources Virtualization for Sustainable Development, Malgorzata Pankowska

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• • • • •

Chapter 7: An Introduction to the Green IT Balanced Scorecard as a Strategic IT Management System, Yulia Wati, Chulmo Koo Chapter 8: A New Recommendation for Green IT Strategies: A Resource-Based Perspective, Yulia Wati, Chulmo Koo Chapter 9:Information and Communication Technologies (ICT) in Building Knowledge Processes in Vulnerable Ecosystems: A Case for Sustainability, Prakash Rao Chapter 10: MSP430 Microcontroller: A Green Technology, Mala Mitra Chapter 11: Toward a Conceptual Model for Sustainability and Greening through Information Technology Management, A.T. Jarmoszko, Marianne D’Onofrio, Joo Eng Lee-Partridge, Olga Petkova

Section 3: Green Finance and Carbon Market • • • • • •

Chapter 12: Price Relationships in the EU Emissions Trading System, Julien Chevallier Chapter 13: Carbon as an Emerging Tool for Risk Management, Tenke A. Zoltani Chapter 14: Voluntary Emissions Reduction: Are We Making Progress? Robert Bailis and Neda Arabshahi Chapter 15: GHG Emissions from the International Goods Movement by Ships and the Adaptation Funding Distribution, Haifeng Wang Chapter 16: Emissions Trading at Work: The EU Emissions Trading Scheme and the Challenges for Large Scale Auctioning, Sabina Salkic, Bernd Mack Chapter 17: A Pragmatic Profile Approach to Evaluating Environmental Sustainability Investment Decisions, Frank Lefley, Joseph Sarkis

Section 4: Green Manufacturing, Logistics and SCM • • • • • •

Chapter 18: Green Logistics: Global Practices and their Implementation in Emerging Markets, Marcus Thiell, Juan Pablo Soto Zuluaga, Juan Pablo Madiedo Montanez, Bart van Hoof Chapter 19: The Impact of Sustainability-Focused Strategies on Sourcing Decisions, Ozan Ozcan, Kingsley Anthony Reeves, Jr. Chapter 20: Green Logistics and Supply Chain Management, Darren Prokop Chapter 21: Greener Transportation Infrastructure: Theoretical Concepts for the Environmental Evaluation of Airports, Jean-Christophe Fann, Jasenka Rakas Chapter 22: A Conceptual Model for Greening a Supply Chain through Greening of Suppliers and Green Innovation, H. K. Chan, T.-Y. Chiou and F. Lettice Chapter 23: An Environmentally Integrated Manufacturing Analysis Combined with Waste Management in a Car Battery Manufacturing Plant, Suat Kasap, Sibel Uludag Demirer, and Sedef Ergun

Section 5: Regional Development •

Chapter 24: The Impact of Electricity Market and Environmental Regulation on Carbon Capture & Storage (CCS) Development in China, Zhao Ang

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•

• • •

Chapter 25: A Critical Assessment of Environmental Degeneration and Climate Change: A Multidimensional (Political, Economic, Security) Challenge for China’s Future Economic Development and its Global Reputation, Christian Ploberger Chapter 26: Study on Low-Carbon Economy Model and Method of Chinese Tourism Industry, Zhang Mu, Luo Jing, Zhang Xiaohong, Tang Lei, Feng Xiao-na, Chen Shan Chapter 27: Government Policies and Private Investments Make for a Bright Cleantech Future in India, Gavin Duke and Nidhi Tandon Chapter 28: Building a Sustainable Regional Eco System for Green Technologies: Case of Cellulosic Ethanol in Oregon, Bob Greenlee, Tugrul U Daim

LOOKING FORWARD At present, low carbon development has been penetrating into various disciplines, becoming pervasive. This low carbon trend has been arousing interests from all kinds of people, including politicians, business professionals, and academic researchers, originating from the environmental movement, towards national strategy and policy worldwide. However, practice and adoption of low carbon technology in business or industry are not smooth. Low carbon is often associated with terms like more capital expenditure and less operation efficiency. Thus, while low carbon development is an important matter, sustainability now has to move beyond environmental concerns to a holistic view, over emerging business models, low carbon and clean technologies, technology access and finance, and policy and regulations. I believe this book appears at the right time. I genuinely hope it will bring insights and enlarge your view into this urgent field. Zongwei Luo

Section 1

Business Models, Regulation and Standard for Sustainability

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Chapter 1

Towards the Transition to a Post-Carbon Society:

The Crisis of Existing Business Models? Sophie Galharret Expert on Energy and Climate Issues, France Laurent Beduneau Wang Expert on Strategy & Transformation of Business Model and Financial System Issues, France

ABSTRACT Traditional strategic approaches based on competitive market environment analysis are increasingly challenged. In particular, the political momentum around global environmental issue (such as climate change) aspires to transform the traditional fossil-fuel based-economy into a low-carbon and sustainable world. Taking this into consideration, the authors of this chapter explore how existing businesses are envisioning the prospect of a low-carbon future into the elaboration of their strategies. This chapter provides a diagnosis of internal and external factors that will trigger incentives to reshape business models incorporating green considerations, on a basis of three sectors analysis (oil, car and outdoor sportswear industries). The authors are aiming at enlightening the way they conceive the transition and the challenges that remain for business transformations.

INTRODUCTION The economic boom experienced after the second world war paved the way for the development of DOI: 10.4018/978-1-60960-531-5.ch001

an economic model based on mass production and consumption. Environmental awareness and its reintegration in businesses has been a progressive process arising in the 70s. The first oil crisis was a driver for an increase in the efficiency in the use of inputs, whereas the main reason pursued

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Towards the Transition to a Post-Carbon Society

was not environmental but economic purposes. Serious industrial accidents raised public concern on industrial safety. To this respect, corporate responsibility took its roots in safety issues and made progressively its way to environment and broader sustainable development concerns in the 90s. To address this, norms, regulations and voluntary initiatives started to develop, and progressively, the questions of the corporate impacts on environmental and society became unavoidable. Businesses face now a huge challenge: how to remain competitive in a fast evolving and highly uncertain context in which environmental issues become more and more strategic? In particular, climate change may provide the main exogenous driver to radical changes in the way to conceive the generation of financial value (the business model) in the near and medium future. Indeed, exhaustion of fossil energy resources and energy security issues back the political momentum to strengthen policies and measures to shape a new economic paradigm and shift to low carbon production and consumption patterns. The challenges raised by the prospects of a low carbon economy– at a 2050 horizon- imply that green business model will need to be widely spread and generalized. What are the requirements for businesses to anticipate and evolve so as to remain competitive in a low-carbon economy? Provided that each economic sector is highly specific (in terms of assets, technology, regulation, market consumer, value creation etc.), a sector by sector approach is necessary to isolate the impact of external and internal factors that will trigger the incentives to reshape business models. This will allow to build a diagnosis on how business are considering the transition to a low-carbon economy and to what extent they are facing this issue. It aims to build on specific experiences to illustrate the conditions for the creation of new economic models and how to make them emerge.

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BACKGROUND Environment and the Need for Renovated Strategies In a basic sense, a business model describes the rationale of how a company generates financial value from an economic activity and sustains it. To this respect, the strategy of the firm since the eighties consists in analyzing the traditional Porter’s five forces. Michael Porter provides a framework to better identify the context in which industry operates. It identifies five main determinants of the competitive intensity of a sector and how they influence corporate strategy. It includes the degree of rivalry, barriers to entry, risks of substitution (in products and services), power of suppliers and buyers’ power (Porter, 1980). In this approach, the main company objective is to shape comparative advantages out of the analysis of these five forces, to build its model upon them and sustain it. Porter identifies three strategies to take an advantage on the market: low costs, differentiation or focalization. In this approach, the competitive environment plays a key role in framing corporate strategy and the performance level it can reach. This framework was especially workable in the 80s in a quite stable environment. Richard d’Aveni (1995) shows that little after, companies were submitted to a profound modification of their competitive market environment, defining it as a new era of “hyper competition”. This translates into a far more complex and unstable environment with the emergence of new sectors in technology, internet or computing sciences; the liberalization of markets and the globalization of firms. Changes are accelerating, upsetting traditional business models. The leaderships are continuously called into question and no comparative advantage is definitely acquired. In this new configuration, the company is compelled to adopt proactive strate-


gies, innovating in the conception of products and services to renovate its leadership. Companies need to influence, to their own advantage, the competitive environment, adapting their resources and competences, innovating and catching up with external influences, to continuously revise their strategic choices (Serge Edouard, 2007). A renewed strategy theory described among others by Gary Hamel and C.K Prahalad consists to consider, not only the company position in the competitive environment but its strategic intention, leading to “strategic ruptures”, as the company will not follow the usual rules in force in the considered sector but rather redefine and impose the new rules of game. These approaches question the “top-down” declination of strategies in firms, based on competitive market environment analysis. It paves the way for considering the value proposed to buyers and the intangibles associated with it, but also the involvement of the bottom of organization, the new conception in the innovation processes, not only including innovations in products or services but also in management and social organizations (e.g. Jim Collins, 1997). The environmental and social crisis (like Erika, Enron… etc.), the global environmental problems (including pollution, climate change, resources depletion) and the increased pressure of a large set of stakeholders are part of the new factors to be considered in the conception of strategies. According to Martinet and Reynaud (2001,2004), the predominance of the “shareholder value” enabling the shareholder to play a leading role in the definition of corporate strategy give way to an approach based on “the stakeholder value”. The expectations of a broader set of actors lead to reconsider the position of the firm and its strategic management. Environment is therefore one of the new motor driving the renewal of strategies that can lead managers to impose their views of future, proposing strategic ruptures that will reshape the factors of success in the considered sector (Geroski and Markrides 2005).

Environmental concerns are envisaged in many different manners according to companies, leading to distinct behaviors or strategies: from pure compliance to strategic ruptures. These various approaches are closely linked to the fact that businesses may or may not consider environment as a factor of value creation. The fact that green strategies can provide profitability is indeed an issue in itself.

Linking Environment and Private Profit It seems a prerequisite that “Business is business” and not a philanthropic activity. We expect businesses to be profitable, however, it is not opposed to the deliverance of some public good. How could both be synergized? Pigou has introduced the concept of externality in 1932 to reflect the incapacity of the market to take in charge the problems linked to environmental damages. Negative environmental externalities reflect a situation where private cost experienced by a producer or a consumer differs from the social cost derived from its production or consumption. An agent welfare is affected but not compensated by a transaction on a market. Part of these externalities have been endogenised in business via public regulation by setting an explicit or implicit price on externalities: •

•

through regulatory instruments such as norms on emissions, deliverance of licenses complying organization to compel with a standard which has direct impact on production costs through market-based instruments such as tax or cap and trade schemes (on CO2 for instance in Europe).

Regulation is therefore a first driver to create relevance of environmental issues to business. The scope of action of companies will encompass pure compliance to regulation to more elaborated and

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Figure 1. Scope for environmental strategies; adapted from Orsato (2009)

pro-active strategies, in response to what they consider the scope of the comparative advantage they can benefit from these strategies implementation. Thus there are some window of opportunity to meet both public benefit and private profit, but these models of activities or innovations will highly depend on the internal and external context of each organization. If opportunities are reachable for all business types, internal and external circumstances will largely influence their capacity to capture them and according to their specificities, each company will define the scope of its environmental action, more or less close to the vertical axis in Figure 1. There is no single theory to establish the infallible rule that may lead to a sustainable and profitable green strategy or to isolate unconditional “win-win” strategies. Being green does not always create value as many factors will intervene in the conditions to succeed. The creation of economic value and the extent to which the businesses may reintegrate environmental concerns in their activities may depend on these green innovations to meet shareholder’s expectations or the capacity of the business to change these expectations and impact their boarder context if the green innovation does not meet their short term criteria. Some strategic decisions are not only justified by economic profitability, as a green strategy may

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also end up with positive however intangible effects and be an empirical justification to implement it. These returns are usually difficult to disentangle and to quantify ex ante. But this leaves room for the managers to impose their vision of the future.

FRAMING THE CONDITIONS FOR A LOW CARBON FUTURE Issues and Methodology Beyond some success stories, the question here is how these business models are keen to emerge and be generalized for they become the norm and shape a new economy paradigm. The vision of the future, the ended point, seems highly important in this discussion. There is a new momentum, in politics, business and society where environmental concern start to be understood as an holistic problem and envisaged as a prerequisite to sustain livable, even more equitable, society in the future. Finite resources start to be a concern, be strategic (energy for instance) or the preconditions for geopolitical stability (limiting global warming). The Copenhagen Accord obtained in December 2009 provides a sign that all nations recognize these challenges and agree to comply with the adoption of national strategies to limit global warming. However, the multilateral agreement is


proceeding under a “bottom-up” approach, adding up the objectives and actions that developed and developing countries will undertake to reduce their emissions. There is no overall international architecture to ensure that the ultimate climate objective enclosed in the agreement will be reached1. Therefore, there is so far no common view established and shared at the international level of what a low-carbon transition implies for worldwide economies Sectoral and macro economic scenarios help to frame a vision of the future where the preconditioned hypothesis is the reduction of GHG emissions by 2050 compatible with the limitation of global warming to 2°C on the long term, under an agreed assumption that this objective may encompass broader sustainability challenges. Under these assumptions, some scenarios (Fonddri/ EPE joint research program 2008) show that on the long term, many business opportunities are maintained however they rely on a radical new economic organization both in developed and developing countries: •

•

•

•

Broad technological innovations and developments of Low Carbon Technologies in all economic sectors. In particular, a rapid diffusion of low emitting technologies in transport, building and industry Development and diffusion of new energy technologies associated with Renewable, nuclear and Carbon capture and storage In building, the optimization of the design of buildings (climatic architecture, diffusion of low consumption buildings), the increase in the share of renewables (an in particular solar energy for heating and hot water) or the optimization of energy in collective housing through district heating In transport, it supposes a relocalisation of production and consumption activities, radical changes in urban planning, the steep decrease of the single use, a radical increase in public transportation for long

distances, the development of efficient interconnexions or also the diffusion of nonconventional vehicles. New development choices on transport infrastructures, localization of activities, means of mobility, consumption patterns, decentralized energy systems or organization of production systems proved to be, in these scenarios at least, a better strategy to maintain growth on the long term and avoid geopolitical tensions. However, these development patterns are about to create tensions on the economies on the short-term. Whereas major economies have already paved the way to settle low carbon strategies, their commitment so far are not ambitious enough to stabilize the vision of a new economic organization in the future that will provide the framework to make all the required innovations and businesses emerge. One should not expect that all changes would be shaped by business neither. It seems that it is relevant to consider that there is an intricate continuum between the public arena, business decisions and the society evolution, each actor pulling some drivers to transformation, in an incremental and progressive interaction. The challenge for businesses is therefore to be both reactive to these changes and be part of the design of new changes towards sustainability. This overview raises the need to reconcile the theoretical approaches focused on environmental strategies design and possible benefits with some broad economic representations based on the diffusion and generalization of green business models compatible with a low carbon pathway. To this respect, an analysis focused on a sectoral approach may help to scrutinize the specific context of each key economic sector and isolate the existing or missing factors that will ease the transition to new/ renewed business models. This chapter is therefore devoted to a diagnostic at a sector level (energy, automobile and sportswear activities), in the aim to clarify how each sector envisages the transition to a low carbon pathway, taking into account the

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broader upstream/ downstream context and how the existing incentives and hurdles (be it objective or perceived) raise issues to the current business models or provides opportunities for the sector’s transition in the near future. Renato Orsato (2009) appears to provide a useful methodological approach to screen the portfolio of sustainability strategies available to the selected sectors. It combines the Porter five forces approach and the Resource-based view of the firm (according to which the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal). The circumstances surrounding each activity type will influence the competitive focus of the firm (on organisational process or products/services) and the potential source of competitive advantage it will adopt (cost or differenciation). This lies the ground to four main competitive strategies: •

•

•

•

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Eco-efficiency: supposes the optimization of the processes leading to cost reduction reinforcing market advantages Environmental cost leadership: aims to both achieve the lowest cost and the lowest environmental impacts. This implies more involvement than the previous strategy in new development on life-cycle analysis, eco-design, substitution of models of production, commercialization and consumption Beyond compliance leadership: subscribing to voluntary norms and standards or new environmental initiatives, in the aim to demonstrate commitment to reducing the impacts of operation, going beyond what is required by regulation. Eco-branding: the ecological differentiation is central for the marketing and sales of the products or services, and mainly relies on the propensity of the consumers to pay a price premium, which is not the case in other strategies.

An additional strategy corresponds to sustainable value innovation, which goes beyond competition and price constraints, as it provides the occasion to create new market spaces. This portfolio finality is not to provide a framework for a stage-by-stage approach to be adopted by firms. It rather enlightens different options to tackle various aspects of the business: the process, the products/ services and the strategic positioning of the firm. These are not “ready made recipes” for greening businesses, they need to be consistently coordinated and implemented. They are complementary between them and to a holistic approach of the business relation to environment. To be more specific: for instance, a cost optimization strategy seems a pure win-win solution and a natural rationale for business. It seems therefore that cost optimization of the value chain is the natural and first step that all businesses will implement. Whereas a cost efficiency approach may have profitable impact on environment through an optimized use of natural resources, it is not a sustainable strategy per se if it does not question the business in itself (process/ product /strategy). Our case studies will therefore examine how the selected sectors envisage the low carbon transition, i.e. how they perceive their environmental impacts and the threats and opportunities related to the transition to a low carbon economy; how, to this respect, they envisage to maintain competitive advantage in the long-term. This analysis will enlighten what kind of the above-mentioned strategies are implemented by the selected firms and what to what extent the strategies they pursued have effects at the intra-firm, intra-chain (the repercussions on suppliers, buyers and the supply chain), intra-sectoral (repercussions on other firms in the same economic sector) and inter-sectoral (repercussions on firms in other sectors) levels. This analysis will examine to what extent these sectors are path-dependent or opting for ruptures, which will affect the way they reformulate the environmental issues as regards their business evolution.


CASE STUDY: OUTDOOR SPORTSWEAR

Quiksilver and Ripcurl will constitute the two main illustrative cases in this section.

Situation and Questions

A Paradox: Environment at Core but Not Envisioned in the Core-Business

Outdoor sportswear companies enable us to address the impacts on environment of the industry of good production and consumption, in particular manufacture and fabrics. The impacts of any consumption good on the environment can be evaluated taking into account its life cycle, considering different stage related to the production, diffusion and usage of the final product: • • • • •

Raw material production Product manufacturing Distribution Use and re-use End of life

The categories of assessed damages can encompass GHG emissions (global warming) but also acidification, smog, ozone layer depletion, eutrophication, eco-toxicological and humantoxicological pollutants, habitat destruction, desertification, land use as well as depletion of minerals and fossil fuels. This case study was selected because outdoor sportswear businesses are built upon the commercialisation of products for outdoor activities. This statement raises several issues: •

• • •

Is environmental protection a prerequisite of business viability as environment is embedded in its design? How does this sector integrate environmental concerns in its core-business? Where are the driving forces to push for increased environmental reintegration? Are these companies about to build a new vision for the transition to a low carbon economy?

Quiksilver and Ripcurl are two brands that emerged close to nature. They are an American and an Australian company respectively specialised in the conception and commercialisation of sportswear, related accessories (eyewear, bags, etc) and technical equipment (e.g. snowboard, wetsuits, etc), for young, outdoorsy customers, embodying a casual life-style. Both companies operate through regional branches in America, Asia, Europe. Initially developed for and by surf practitioners, the business was based on empirical approaches. The years of steady growth led the companies to realise how much they were tributary to environment. This raised the need to redistribute part of the profits through the creation of foundations (e.g. Ripcurl planet or Quiksilver foundation), aiming at protecting the coastline and mountains and promoting environmental awareness. These foundations convey values on nature protection mainly through sponsorship and communication with several non–profit organisations (e.g. WWF, Surfrider Foundations2, Mountain Riders Foundation3, Surfers Against Sewages, Summit Foundation,4 etc). This trend was mostly inspired from the British charity tradition. It expressed the concern of an industry to protect the very source of leisure activities, at the centre of its business. However, not to the extent to put into question the impacts on environment of the business activities itself. These companies experienced a large success and developed rapidly. They increasingly diverged from their initial surf-community-based approach, adopted even more radical business approach, also in the management of human resources. For these companies, the economic value is usually rooted in the sale of textiles (around 60%) and

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only for a small part, in technical products related to surf activities. Quiksilver’s revenues illustrate this trend: the majority of profits come from the apparel segment, which the company sells through its network shops and through department and sports specialty stores. Originally specialized in surf equipment, Quiksilver had opted for a diversification strategy in order to take a lead position in the global “outdoor” segment. This was in particular the purpose of the acquisitions of Rossignol and Cleveland Golf in 2005. However, while Quiksilver’s clothing and footwear sales have been strong, its equipment segment has been lagging since 2007, in particular with difficulties faced by the snow business. The company is now recentering its activities to lessen its exposure to the equipment slow-down5.

Eco-Branding as Differentiation? The targeted consumers and the related value configuration allow some consideration in the identification of possible drivers to environmental integration in business. The targeted consumers express strong ambivalence as regards environment. The products initially targeted a community that has a strong relationship to nature and that did not find the need to put many efforts in environmental protection. Quiksilver and Ripcurl now acknowledge that their main buyers are not experts but mostly young non-practitioners. Sellers feedback on consumer’s behaviour reveal that they are little aware of environment, express confusion on the identification of environmental challenges and on the interrelation with their consumption choices. Companies however did not enhance their environmental practices in accordance to the sociological evolution of the consumer’s profile. All in all, the final market is very similar to any mass-consumption market, underpinned by strong hedonism references. It is a key element that will structure the environmental vision of these mainstream outdoor sportswear companies. They will

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need to cope with a wider and less experienced market than the ones exploited by companies like Patagonia, specialised in the sale of top-of-therange environmental-friendly products to a niche of experts and well-informed consumers. This said, branding naturally constitutes a key component of these companies’ mid-term strategy. Selling dream and sensations are indeed the main objective, as the targeted consumers make their purchase decision according to the symbols conveyed by the brands and their capability to embody the values of a community of young, casual outdoorsy consumers. Somehow, the surf industry has missed an opportunity to capitalise at its very beginning on its natural relation to environment to expand its economic activity. Whereas environment is the original target, it was not materialised as such in the way to conceive the business development. Their value configuration led the companies to focus their core-business on the apposition of fashionable brands on a large set of products, which explains the predominance of brand marketing in the vision of their strategies. It led them to lose control on the production chain, as these activities ended-up to be externalised (from material suppliers to production factories). These companies rather specialised in the capture of the more valueadded segment of the chain, which relies on the intangible fluctuations of fashion. If a large part of the production chain is externalised, strategic elements such as R&D on technical products and marketing policies remain obviously in the hands of these companies.

The Potential of Innovation and Inter-Industry Collaboration Innovation on technical products is decisive. It creates the main differentiation criteria among the companies on the market, they are therefore fiercely competing on the technical segment. In this specific case, performance is the primary concern whereas environmental considerations


remain secondary. Surf practitioners associations acknowledge that the industry limits the resources it involves in R&D. All the more when it relates to R&D resources dedicated to the improvement of environmental impacts, as this will not enhance neither the performance nor the related competitive advantages of these products. This trend is even more emphasised by the economic downturn. However, some initiatives are emerging at the margin, as it is illustrated for instance by the Ripcurl foundation that supports a partnership on eco-friendly stratification techniques for surfboards. To fill the gap on R&D on environment, the European Surf Industry Manufacturers (Eurosima) has launched a contest in 2009 to stimulate ecoinnovations in the surf industry. They will provide quite significant grants that may unlock some research projects and allow some eco-innovation to emerge in the surf industry. Besides, the association develops several programmes to accompany the industry in the implementation of more sustainable practices. These actions relate essentially to non-strategic activities: e.g. the reduction of life-cycle impacts of the “Polybags”. These are bags used to transport equipments and sportswear’s from production sites to sale points; They also support knowledge- sharing among the industry (promotion of life-cycle analysis information etc.).

Environmental Reintegration Does Not Upset the Industry Whereas there was initially little receptivity for the settlement of an integrated environmental policy, a turning point was reached in the 2000s. This led the companies to adopt different measures to tackle the environmental issues. Ripcurl Europe presents an interesting case study. In 2005, the nomination of a new CEO, Olivier Cantet, strongly convinced that environmental challenges were a key priority, paved the way for the adoption of an environmental policy:

“Environment is today at the centre of Ripcurl strategy. It constitutes an opportunity for the company to differentiate on the market, in terms of products and image. It provides a driver for the improvement of processes in the company and an opportunity to federate all employees and partners of Ripcurl Europe”6. Olivier Cantet is now CEO at the worldwide scale, which provides now the opportunity to spread his environmental approach in the other branches of the company. Ripcurl started from scratch and chose to first focus on textile impacts, as it is the major sale segment with significant environmental impacts. It was also the element on which it was easier to communicate and arouse consumer’s awareness. The decision was to initiate an incremental process to improve the company environmental impacts along time. The approach adopted to reduce the impact of outdoor sportswear was to promote environmental-friendly materials such as organic cotton, hemp, linen, recycled materials etc. It basically consisted in sourcing these materials with suppliers, creating a lever on the supplier’s offer diversification. The life-cycle impacts of the value-chain were however not assessed, as the policy did not envisage reshaping the whole supply chain. As a result, Ripcurl Europe integrated environmental-friendly materials in a large set of products, rather than focusing on a single dedicated eco-line. Up to 50% of the volumes of T-shirt were impacted. Increased costs of production led to a price-premium on final products. This strategy relied on the conviction that this new types of products will provide profitability on the longer-term. However, the consumers seem little influenced by environmental considerations in their consumption choices, eco-branding was not the main argument put forward by Ripcurl in its marketing policy whereas it was the justification for higher prices. As a consequence of the economic downturn and lower propensity of consumers to pay premiums for environmentalfriendly products, the company decided to reduce its volume offer.

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Figure 2. Overview of environmental actions undertaken by Quiksilver and Ripcurl

A second axis of the environmental policy was to foresee environmental impacts at the process level. In 2005, Ripcurl Europe was approached by the European Surf industry manufacturers association (Eurosima) and ADEME7 to undertake an environmental diagnosis. It led to implement an Environmental Management System (EMS) in line with ISO 14001 standard with impacts both at administrative and production level. An illustrative case is the changes that were implemented on the logistic chain. At the launch of a new collection, all products are usually transported by airplanes. An analysis of volumes actually merchandised on

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the short-term led to reduce the volumes imported by airplanes and to restrict them to the short-term requirements. The rest was shipped, leading to an overall improvement of CO2-related emissions. Ripcurl also undertook more symbolic actions with impacts at the corporate level. Whereas the related environmental improvements are all relative, it provides the occasion for the company to be consistent between its “green strategy” formulation and declination. A summary of some key actions undertaken by the outdoor sportswear companies is presented in Figure 2.


The Need for a More Radical Apprehension of the Transition Environment is structural to the outdoor sportswear business, but there is still a loose link between the impacts of the industry on environment and the need for environmental protection, that is tributary to the industry evolution. Customers have taken some distance with the original population targeted by the outdoor sportswear industries and with the values they initially conveyed. A very structural feature of Quiksilver and Ripcurl buyers lies in the fact they are torn between their fascination for outdoor attitude and a strong appeal for hedonism. As a result, their consumption choices are little influenced by any predisposition for environmental benefits. As a consequence, buyers do not yet constitute a driver to move the industry towards a reconfiguration of this business. This illustrates the role that outdoor sportswear companies can play in consumer’s education, and to this respect, they have actively started to promote messages for responsible consumption or work closely with associations on these topics. So important the educational lever could be, it seems limited to provide a short-termsolution to impact consumptions patterns to reshape new markets for the outdoor sportswear industry. In this case, are the regulatory incentives more likely to accelerate the transition to a low carbon economy in the outdoor sportswear industry? These industries are however little impacted by direct regulation that would aim to transform their production patterns, excepted for the REACH directive8 at the European level, and in France, with the “Grenelle de l’environnement” (France’s Environment Round Table9). In 2011, it will be indeed compulsory to inform consumers on the environmental impacts linked to the purchase of a product. This regulation will however have no considerable impact on the way to conceive the supply chain and reduce the impacts of the products, as it is only a labelling obligation. Tougher incentives may come from increased regulatory

pressure in the future, but there is little visibility on this part, and is probably refrained by an overestimated concern of competitiveness erosion. If companies have effectively endorsed some eco-efficiency strategies at the corporate level, actions undertaken to impact the whole value-chain only start to be initiated but no radical transformation has happened so far. Actions on supplier were initiated through the requirements of eco-friendly materials, and also through the diffusion of the process of certification and logistics rationalisation. However, a holistic approach through eco-design to reorganise the whole value-chain is only at its very early stage. These practices are likely to be restricted, so far they apply to a small share of products (e.g. Quiksilver is developing a specific snow collection). Hence, the industry environmental strategies are mainly restricted to a very narrow part of the product life-cycle impacts. Product lines managers are locked into antagonist requirements: incorporating a larger amount of eco-friendly materials in products that reduce the margin whereas they need to achieve high level of profitability. The fact that the market did not respond positively to the eco-friendly products enlightens difficulties to generalise these practices without a profound reconfiguration of value creation among companies’ leaders and shareholders. The environmental reintegration in this industry seems to proceed smoothly, affixed on a traditional conception of the industry business. Whereas these strategies have not paid in the given configuration, no rupture is seriously envisaged by the industry to establish a more eco-friendly model. As a matter of fact, these companies do not envision themselves as natural first-movers on environmental issues, whereas they are probably in the best position to seize an advantage among the textile industry, providing their close relationship to nature. As a result of little receptivity of the market, limited regulatory pressure, restricted involvement on the supply chain reconfiguration and conservatism as regards value creation there is

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no emerging leadership on these issues. Some opportunities may lie in collective efforts to establish the conditions for a low carbon transition. This type of collaboration does exist but are restricted to some marginal and non-strategic aspects. Whereas technical innovation will need to remain in the hands of companies as a source of differentiation, they may find new benefits in gathering efforts around eco-conception and collective efforts to foster supply-chain transformation to make ecodesigned products the norm. New models can also rely on a transition to a “functional economy” (where the sale relates not to the product but to the usage), with new business models to invent around the concept of “t-shirt leasing’ that will allow the companies to master the entire lifecycle of the products and impact more radically the consumption behaviours.

CASE STUDY ENERGY This case study will focus on the energy sector, in particular on the upstream industry (oil and gas companies). Environmental impacts of oil companies encompass: •

•

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Direct impacts related to Exploration & Production (E&P) and petrochemical activities: Greenhouse Gases (GHG) emissions due to flaring10, venting and refining processes but also air, water pollution and ecosystems damages due to the exploitation of oil shale reserves or in the occurrence of accidents (oil spills, pipeline corrosion…) Indirect impacts: of CO2 emissions linked to the consumption of petroleum products in the economy. Indeed, the combustion of fossil fuels is omnipresent to sustain the development of our economies, in all sectors (heavy and manufacture industry, power production, transportation, agriculture…).

The fact that oil companies control substantial technological, financial and organisational resources is a motive to identify them as a potential key lever for the transformation of the whole energy chain. Climate change is however an issue that has provoked strong controversy within the oil industry. Oil companies have adopted contrasted reactions as regards their responsibility towards climate change and the ways to address this issue. Many oil companies in the US have strongly lobbied their government in the late 90s ending with a non-ratification of the Kyoto protocol. This raises several questions: • •

•

•

What are the factors that pushed companies to diversify or not their core-business? How did they embed the low carbon economy challenge in their diversification process? What is companies’ perception of oil future? How does it impact their vision on the need to reconfigure or not their businesses? Is their market receptive to a low-carbon transition? Does it provide a relevant driver to transformation?

The Emergence of Environmental Concerns in the Oil Industry The Exxon Valdez oil spill in 1989 was decisive to initiate reporting on environmental behaviors in the US (starting with Exxon and Texaco), followed a few years later by companies like BP and Shell. The impact on environment has become increasingly contentious in Europe, peaking with the Erika oil spill (Total in 1999). The divergent behaviors of companies to more or less aggressively tackle broad environmental issues can be explained by a large set of factors including corporate history of profitability and geographical location, organizational factors, market assessments, or stakeholder involvement (Kolk and Levy, 2001). The authors show that a US-European comparison presents differences in the overall socio-cultural


and political contexts, in particular related to the timing of societal concern for climate change, the corporate reactions and interactions with stakeholders, including NGOs and policymakers. In particular, whereas public concern emerged more rapidly in the US than in Europe, the industry got tensed and formed an issue-specific association to lobby against any regulation attempt, with Exxon Mobil an illustrative example. In Europe, under an increase of social awareness, BP and Shell have felt enhanced pressure from their stakeholders, leading these companies to withdraw from industry coalitions against climate change. In general, these companies have adopted a more cooperative approach with their stakeholders than Exxon Mobil. Another difference is the emergence in Europe of a compulsory regulation on climate change, as a declination of the strategy to meet Kyoto Protocol targets. As a consequence, since 2005, a significant perimeter of activities of oil companies present in Europe is submitted to compulsory emission reduction targets (refineries are including in the European Emission Trading scheme). Economic and market position influence also the way oil companies will tackle environmental issues. Exxon capacity to implement a restructuring model, based on cost reduction, efficiency and shareholder value models, led the company to benefit from high return on capital, creating little incentive to shift from the initial strategy. The more difficult situations experienced by companies like BP and Shell might have created the opportunity to shift their market orientation. There are two distinctive trends located at both ends of the spectrum: •

Companies like BP and Shell adopting a first-mover attitude. BP quitted the Global Climate Coalition11 (the most powerful lobby organisation against climate change) in 1996 and adopted by then a proactive strategy to diversify activities (including investments in renewable energies).

•

Exxon Mobil maintained a strong lobby against any mandatory target, pledging that there was no scientific evidence of climate change, whereas mitigation measures would be prohibitive. In the early 2000s the company ended up with recognising some scientific basis to climate change, however it did nothing to reverse the strategy orientation focused on its original core energy and petrochemical business.

The Impact of the Long-Term Vision on the Environmental Strategy Design Comparing the case of Total and BP illustrates two distinctive apprehensions of the oil future and the need to revisit corporate strategy in the view of a transition to a low carbon economy: The BP’s approach to climate change was pushed extremely proactively as soon as the company publicly acknowledged the need for precautionary action to climate change. The declination of a green strategy relied on two key pillars: •

•

the leadership culture, particularly embodied by the CEO John Browne, as regards environmental responsibility; the traditional Health, Security, Safety and environment culture, as a core value of BP.

John Browne introduced and developed the alternative energies theme in BP following his conviction that climate change and energy security will constitute the two main challenges faced by the oil industry in the future. Illustratively, the company name was turned into “Beyond Petroleum”. The vision of John Browne at BP was indeed to consider alternative energies as a new market opportunity that may grow over time to constitute a significant share of the business on the longer term, along with traditional petroleum activities. He had the vision that energy transition will be an important factor to integrate in the future

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company strategy, leading to a fast deployment of significant resources in diversification: “BP alternative energy business manages a series of dynamic, fast-growing activities, including solar, wind and hugely promising technology of carbon capture and storage. All those activities carry the potential to help the world make the transition to a lower-carbon economy- a transition that is essential if the risks of climate change are to be avoided and is a sustained transition that BP started 10 years ago”12. BP committed to important investments to pursue a wide range of opportunities, organised in numerous decentralised units, led by influential Business Unit leaders. The BP case shows an example of an oil company aiming to redefine itself as an energy company in a broader sense. The position of Total seems rather more conservative in its approach. The CEO, Christophe De Margerie acknowledges the emergency of climate change issues, but remains confident in the predominance of fossil energy sources in the mid term and sceptical as regards the concept of a global “decarbonisation” of the economy13: “Humanity cannot escape the following contradiction: it will takes many years for low-carbon energies sources to overpass fossil fuels. To acknowledge this does not mean being irresponsible, it is being realistic to undertake actions” 14. The company finds necessary to diversify its activity but envisage these investments as a realistic answer to the evolving context (enhanced energy security issues and environmental concerns), leading to the adoption of measured approaches.

The Reliance to the CoreBusiness as a Pullback Force BP technological choices and innovation strategies started with a strong diversification in solar in 1997. The company also set target on emissions from its operation in 1998 (-10% under 1990 emission level to be reached in 2010), initiated research on pre-combustion CCS in 1999 and

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chose to develop a large set of technology options including solar, wind, hydrogen and gas-fired power plant in the 2000s. All these activities were grouped in “BP alternative energies” in 2005. The diversification process of BP started with some mature technologies (such as wind, some solar technologies and gas-fired power plants), but the company also decided to get actively involved in the development of longer-term options, with R&D on CCS and hydrogen. However, in 2005 and 2006, the company faced a huge reputation risk with the conjunction of several events: an accident on a production platform in the Gulf of Mexico, a considerable oil spill in Alaska, and an explosion in Texas City refinery. All these factors combined induced the necessity for the company to review the nature of its activities. It ended up with the decision to re-centre activities on the core-business and as a consequence, the company reduced considerably the renewable energy portfolio. A large part of the alternative energy branch is focusing on biofuels. The CEO Tony Hayward declared in June 2007: “Beyond Petroleum…was not, and is not a denial of our core business…[it is] about three things – producing more fossil fuels more efficiently today, making better use of fossil fuels and beginning the transition”. Total selected alternative technologies synergising the most with its core-business. The options undertaken were primarily: producing more energy more efficiently, increasing efficiency of petroleum products, developing biofuels and the Carbon capture and storage (CCS) technology. A secondary priority was to acquire capital in renewable energies (wind, biomass and solar). The company is more aggressive to earn a position in the nuclear sector (as shown by the attempt to get involved in a project in Abou Dhabi with a consortium gathering EDF, AREVA, GDFSuez, Vinci and Alstom). There is no specific unit dedicated to renewable energies, as they are grouped within a broader sub-unit “new energies”, including also nuclear and Liquefied Natural Gas. The


renewable activities are not represented at the Executive Board level, which decides of the investment choices. This emphasises the fact that Total remains very much focused on the development of fossil fuel energies as its core-business and its innovation and diversification choices: more efficient petroleum products is a win-win option, whereas biofuels promotion is not a revolution in the business apprehension. As regards its innovation and diversification strategy, the oil industry has a natural role to play in CCS development as it has used CO2 injection in dwells to improve oil recovery yields. Moving to power production is however another business; It means mastering new competences. For instance, Total has chosen to invest some capital to buy existing renewable energies companies that have the knowledge of equipments development and operation. The amounts of investments in the renewable are however marginal compared with the billions invested in the core-business activities; The company remains reactive to new technologies options, however is not envisaging a serious inflexion to more diversified energy activities. The fact that E&P activities are located upstream in the energy chain creates a loose link with the final market. The civil society seems however very concerned by possible environmental impacts of oil industry activities, as a consequence of environmental disasters that occurred in the past. However, this contestation rather pushed for the integration of more responsible behaviours in the practices than for a revision of the core-business. As a matter of fact, it seems that citizens do not apprehend all the interrelations between their consumption patterns and the oil industry development. So far, it has triggered the need for oil companies to become greener and they did it by investing in low carbon energies, first the ones substituting to their core-products, biofuels, and second by investing in new processes, power production. A rupture seems however not credible independently of a profound revision of the fossil energies consumption patterns on the final

market, as the core-business is tributary to a double inertia: huge fixed assets and the impossibility to redeploy them on the very short term; extremely profitable environment of the oil industry on the mid and longer term.

Towards a Radical Transition? This overview provides contrasting examples on how oil companies conceive the transition to a low carbon pathway: •

•

•

Reactively: manifested by Exxon, denying the recognition of climate change effects (at least until the 2000s). Conservatively: Total illustrates a case of a company that acknowledges the need for diversification but does not envision a radical shift of the business model in the mid term. It is rather a follower, investing to acquire capital in renewable power production, which is indeed another business, to ensure it will catch up if these emerging trends strengthened. Proactively: BP adopted a first mover attitude, as the company envisioned that alternative energies might become a second pillar of its core business. It is now downsizing its ambition. It has reduced its portfolio to focus on alternative energies closest to its core business.

The more proactive strategies (e.g. BP) were driven fist by a strong involvement of leaders with the firm stances of the CEO and the personification of the challenges through the declination of low carbon strategies by unit’s leaders. It was also founded on the mobilisation of significant resources, a proper organisational structure and the deployment of investments in energy diversification. However, the diversification was not fully anchored yet as temporary difficulties have played as pullback forces. The company decided

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to streamline its strategy in coherence with its initial core-business. The vision of the future is decisive in the way oil companies envisage their strategy and decide to allocate a more or less important share of their considerable resources in its realisation: •

•

it impacts the timeframe to which they project their strategies (in the long-term for BP, on the shorter-term for Total); it impacts the way they envisage their business evolution according to the market share they acknowledge to renewable energies on the mid and longer term.

However, there is no credible threat that on the mid-term oil demand will considerably drop. The business is likely to remain profitable, as the increase in energy demand in fast growing economies create tensions on the market and may sustain prices on the longer term, emphasised by the depletion of conventional oil reserves. The prospect of higher prices may allow the exploitation of large reserves of non-conventional oil (oil shale) and maintain confidence for high returns to shareholders. The question is therefore rather to which extent the business will expand, as a result of interaction between energy security issues, economic and environmental considerations. Indeed, even in a configuration where a serious decarbonisation of the economy take place, fossil fuels will constitute a significant share15 of the primary mix, whereas in practice, it accounts for a severe reduction of oil demand compared with “business as usual” trends. A BAU scenario is however not desirable even for oil companies as it would create tensions on production capacities with possible severe economic and geopolitical impacts. External drivers such as emission regulation and the implementation of energy and climate strategies at state level in major economies (more proactively in Europe, under serious development in China, in consideration in the US) confirm that the deviation from business as usual is credible

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however does not provide certainty on the magnitude of the transformation. As a consequence, the vision of the transition to a low carbon economy by the oil industry itself remains somehow partial. The strategies are adopted at intra-firm level and encompass eco-efficiency (increasing the energy content of petroleum products, energy efficiency of process, etc.), and to a lesser extent, some attempts of eco-branding with the introduction of biofuels. These strategies rather focus on the core activities (process and products), i.e. on the upstream nature of the oil industry activities. There is no attempt to create rupture in the nature of business or reinvent the business. The companies rather try to move downstream, with the acquisition of competences in existing other energy businesses like power production. However these companies do not really envisage strategies that will trigger a radical shift to a low carbon world. Indeed, there are dedicating very little amounts of their considerable investment capacities to the reconfiguration of downstream usages of petroleum products that will underlie a progressive regression of activities based on E&P and petrochemicals. For instance, the vision of their involvement in low-carbon transport is often restricted to the development of biofuels, cleaner fuels and lubricants and to the promotion of educational programmes dedicated to motorists. Projects that tackle the usages of oil are very rare (we can mention a BP project supporting research on mobility with Tshinghua University or WBSCD).

Remaining Challenges for the Transition in the Oil Industry Independently of the oil market evolution, oil companies still need to improve their E&P practices to reduce their direct environmental impacts, not only on climate change but also on local ecosystems and population. There are two main challenges:


•

•

Eliminating flaring by the valorisation of gas co-products. These practices continue whereas many countries have officially banned it (e.g. in Nigeria) The exploitation of oil shale is energyintensive, impacts considerably water resources and emits dangerous atmospheric pollutants.

There are also some more strategic issues for the mid-term: Oil companies start to diversify by moving downstream on the energy chain. Is a diversification to broader energy activities relevant? Oil companies have started to invest in power production, and in particular in renewable energies; For some companies, it seems that a main driver of this diversification was public receptivity creating the need to “green-wash” their image. For some others, it seems to correspond to the willingness to seize new market opportunities and be reactive to the transformation of the energy market. However, they rather remain incremental. These are rather reversible strategies, which represent an adequate option for companies to remain agile and adaptable to new contexts; In this specific case, however, it illustrates a strong resilience to the core-nature of the business. Producing power is another way to do business than producing oil, meaning that it should require a profound revision of the business orientation (resources, competences, partner networks…). The fact that these attempts remain quite restricted make them more precarious and more easily revisable than for pure power and gas companies that already master the market, networks and the constraints of power production. Oil companies might have a key role to play in the reconfiguration of oil usages. This would imply the development of new skills within oil companies and the implementation of new business models around them: the development of very high-value activities, restricted in the longterm to the non-substitutable usages of oil. The

possibilities to create value through demand-side management, in particular in the transport sector (accounting for 61.2% of world oil demand16) where there is so far few oil substitutes. The oil companies could play an active role by investing resources to shape the sector transformation promoting a non-conservative vision of the oil usages. This can encompass inter-sector collaborations and innovations with carmakers (e.g. on electric vehicle), which synergises adequately with the choice to diversify power production. To this respect, oil companies may also find opportunities to collaborate with high-technology groups such as Siemens which has an original vision on more decentralised model of power production and consumption related to the development of electric car and smart grids. Eventually, they may envisage collaborations with policy makers to promote a new vision of mobility and urban planning: development of car-pooling or investments in public transportations to foster inter-modality.

CAR INDUSTRY CASE STUDY Situation and Questions Car industry generates CO2 emissions and environmental impacts in two ways: •

•

Direct impacts related to the supply-chain of car manufacturers from conception to distribution: production in plants, transportations of raw material, energy used in industrial process, etc. Indirect impacts due to the use of cars by customers: car transport is responsible for an important share of worldwide CO2 emissions and generates, among others, noise disturbance. The energy consumed for car transport provides a good proxy to assess the share of cars in the overall CO2 road emissions. The energy consumed by cars amounted to 150 millions of tons oil

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equivalent (150 Mtoe) in 2005 in Europe representing almost 2/3 of the total energy consumed for road transportation (European Energy and Transport, Trends to 2030, update 2007)

•

Considering that the car supply-chain has nothing specific in terms of CO2 emissions and environmental impact than any other industry, this case study will mainly be focused on the indirect impacts. Car transport played a key role in the XXth century industrialisation and economic expansion; It contributed to the development of economy, mobility and enhanced industrial competitiveness. However, the intensification of car transportation increased the pressures exerted on the environment, with significant effects on climate change and biodiversity. Curbing effects of car transportation on climate change is a huge challenge. It would imply to activate several levers to impact:

•

• • •

The level of car activity: through demand management, urban and land planning The energy intensity ratio of car transport: through increased efficiency of vehicles, network optimisation (smart grid) The emission intensity ration of car transport: through fuel switching, technological innovation

To this respect, the transformation of car industry is crucial. The success or not of this sector’s transformation is likely to be a signal that transition to a low carbon economy is effectively taking place or not. It covers much more than pure technological challenges. This case study will focus on a specific technological innovation, the hybrid and electric vehicles (EV) that were initially worked out by the car industry to provide substitutes for high-emissive vehicles. This entry will allow raising several questions as regards the broader challenges for a low carbon transition in the transport sector:

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•

•

How is the car industry envisaging the adaptation of its business model to a low carbon economy? What kind of innovations are key to succeed? What are the constraints brought by innovative batteries? Is the vision of “sustainable mobility” a reality? Does it provide a driver for transformation in the car industry? What are the drivers that are redefining and extending the value chain of car industry?

An Early Environmental Awareness without any Structural Change Today, there is no doubt that cars harshly pollute environment and corner oil resources (61.2% of worl oil consumption in 2007 according to IEA, key world energy statistics 2009). This statement has been more and more shared over the last 40 years, just after the first oil shock in the seventies. Many regions of the world have started to tackle environmental impacts linked to car transportation by implementing regulations on GHG and other pollutants emissions. This is the case for instance in Europe or in the US. In Europe, the 1998 Fuel quality directive introduced specifications for diesel, petrol and gas-oil used in road vehicles to limit impacts on health and environment. This directive is currently under discussion to further strengthen the standards. As regards CO2 emissions by cars, in 2007, the EU commission proposed a binding legislation that would compel car manufacturers to reduce the emission intensity of new cars. After some intense discussions, a compromise was reached among member states to gradually limit CO2 emissions of new cars at 120 g/km, for 65% of the new fleet in 2012, 75% in 2013, 80% in 2014 and 100% in 2015. Moreover, the Energy and Climate Package establishes a mandatory 20% emission reduction goal under 1990 by 2020. Whereas energy sectors will significantly contribute to reach this target,


Figure 3. Relation between technological advancement and environmental performance

it will also translate in the need to further curb emissions in the transport sector. In the US, California was a pioneer state in introducing strict emission standards for road vehicles. The 2004 ARB regulation aims at cutting GHG emissions of car transport to 1990 levels in 2020 (corresponding to a 30% cut relatively to 2004 levels) and to reduce emissions to 80% under 1990 levels by 2050. As a matter of fact, the car industry needed to take environmental issues into account. They worked proactively on several environmental improvements, including the increase of car efficiency. They realized that a more radical way to decarbonise the car sector is to find a technological solution that will provide the same service with no direct emissions. As a result, the car industry has looked for moving from internal combustion engine (ICE) to low emitting technological solutions. Several experimentations were tried, either for hybrid or electric cars or also hydrogen. Before the Toyota Prius model emerged, it however always led to failure. For instance, in the seventies, General Motors (GM) invested huge amounts in hybrid cars without any concrete results. In the eighties, GM made a new attempt introducing an “EV1” model, but, again, it led to failure in the nineties. A famous documentary, “Who killed the electric car?” (2006) by Chris Paine demonstrates that all stakeholders are responsible for this failure in the US: the car industry but also the oil industry, the US government, and

US consumers, etc. It was just not the right time for the electric vehicle: the technology was not ready to be sold at a price that can be supported by customers even if California’s government provided financial incentives for it. Above all, the cost for GM to transform its own business model around the EV and the need to find new outlets for oil companies in case electric car would have emerged discouraged GM which finally turned into an opponent of the EV. Eventually, GM gave up the EV1 model. However, after the Rio de Janeiro Summit in 1992 and the Kyoto protocol (1997), stronger environmental awareness spread among several key actors of car industry. It triggered a new cycle of R&D investments into electric car and other technologies, and measures to mitigate CO2 emissions; CO2 has been the most popularized issue but many other environmental problems were also taken into account: noise, car passengers safety, respect of street walkers and drivers, traffic jam, etc. Since the mid-nineties, given that CO2 emissions reduction has constituted an environmental priority, car manufacturers started to consider this issue not only as a constraint on financial margin but also as an opportunity to capture new markets. For the car manufacturers that have integrated environmental issues into their strategy, technological choices and ambition to reduce CO2 emissions are closely linked as in Figure 3.

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Several approaches have been considered by the car industry. Schematically, 4 strategies were adopted: •

•

•

•

The ones that have ignored environmental issues or did not aim to integrate them into their strategies, like Chrysler The ones that have tried to find gradual solutions, like the Hybrid Electric Vehicle, to cope with increasing environmental constraint, like Toyota, PSA-Citroën, Volvo-Ford The ones that wanted to keep several technological options in hands like the German car manufacturers, Volkswagen, Daimler, BMW, or like car companies from emerging countries, like Chery (China), more recently The ones that chose a radical shift to the electric vehicle (EV) like Renault-Nissan, Tata Electric Nano or to the Fuel Cell Electric Vehicle like Honda.

Ford evicted electric in the 20th century. Even if there were several attempts to re-launch electric car, it always failed. One of the most striking examples takes place in California in 1990 when the Zero Emission Vehicle act was passed. It made mandatory for car manufacturers with over 35000 sold car a year to realize 2% of local selling with electric cars by 1996. However, with the resistance of car manufacturers, California had to remove its ZEV law in 1996. How to explain that EV and HEV car did not succeed in entering into mass-market after 1913 whereas the industry experts regularly expected the development of a huge market? Several reasons can be raised, on the basis of F. Frery work (2000): •

Hybrid Electric Vehicle and Electric Vehicle are Innovations… That Exist for More Than One Century Paradoxically, the use of electricity for vehicles is not a brand new idea (F. Fréry, 2000) whatever we consider hybrid electric vehicle (HEV) or electric vehicle (EV): • •

The first hybrid vehicle was developed in 1901 by Ferdinand Porsche. Electric vehicles are even older than the combustion engine vehicles. The first electric car wheeled in the US in 1834 and was sold in 1852. In 1900, 19 electric car manufacturers were operating in the world.

A gas-fueled car was patented in 1886 by Karl Benz. Since then, it has competed successfully against electric car. Electric cars targeted upper classes. With the mass-production of fuel cars,

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•

•

Consumer behaviors: if the average performance of EV fits a majority of drivers’ requirements, that is to say between 10 to 20 km a day in urban areas, it appears that some motivations to purchase a car are different from the current use they will make. When a consumer buys a car, he/she will not only consider daily use but also specific options he/she can use in case of any events. Ability to drive distance to leave urban areas during weekends is one of them. Purchasing act is therefore much more complex than reflecting the simple statistics of average uses. The EV does not provide an equivalent substitute in the mind of consumers, which contributes to explain why it led to some illusive expectations about market growth. Costs: high cost of battery that impacts considerably the purchase cost of the car compared with a conventional vehicle. Whereas the use of EV can be more profitable in the long-term, consumer is rather likely to opt for the least-cost solution when he/she makes the initial investment decision. Infrastructure requirements: EV involves the development of a network of


•

battery reloading stations. All past experiences show that the development of areas to reload battery was limited Reliability: The lifetime of electric engine is six times higher than the one of internal combustion engines. Hence, the massive adoption of EV would imply a radical transformation of the entire car value-chain with heavy social consequences for the car industry (manufacturers, retailers, repairmen, car leasing companies, etc).

Hybrid or EV options reduce or lead to zero direct emissions, however it shifts the responsibility for decarbonisation towards the power or hydrogen production sectors. A true decarbonisation of the transport sector will not only come from the substitution of fossil fuel to power (with the improvement of the emission intensity ratio evoked previously) but will need to be accompanied by a profound revision and a more integrated vision of urban and inter-urban mobility. This assessment and the difficulties acknowledge for the emergence of EV raise some questions to the strategies that the different car manufacturers are now developing: • •

•

Are the current emerging EV strategies radically different from the past? Are they diverging from of a pure technological approach? It seems that in the past experiences, the EV strategies rather focus on technological and technical elements rather than consider the broader socio-economic context that will be necessary for the EV to emerge. Are the more pro-active constructors anticipating the need to integrate all these aspects to move from a business focused on cars to a broader apprehension of mobility?

If in the 2000s, no experience broke successfully on the mass-market, the situation in 2010 seems indeed different. Toyota succeeded to make

its HEV Prius a mass-market innovation. Another case study seems promising: the Renault-Nissan partnership with Better Place. As regards the Honda strategy to target hydrogen engine around 2020 seems to be the most prospective but the riskiest innovation.

Complementary Sectoral Strategies to Cope with the Transition to a Low Carbon Economy in the Short, Medium and Longer Term •

An incremental strategy to prepare 21st century environmental challenge: Toyota Prius project

Toyota Prius model was launched in Tokyo in December 2007. Prius is based on internal combustion hybrids. It combines an engine and a motor to distribute power efficiently and recover kinetic energy during deceleration, converting it to electrical energy for storage in a battery. As mentioned in a case study developed by the World Business Council for Sustainable Development (WBCSD, 2005), a transversal group was set up in the early nineties to prepare the Toyota’s 21st century car. Conclusions can be briefly sum up in two main ideas: the new car should be environmentalfriendly and equivalent in comfort compared with “present” cars. In a first step, they aimed to reach a 50% increase in fuel efficiency. Under the pressure of the executive vice-president, Akihido Wada, an objective of 100% increase in fuel efficiency was defined. There was no choice, it required some radical innovations. Thus, based on several years of heterogeneous and discontinuous research works on hydride engine systems such as highly efficient gasoline engines, advanced electric motors, more than hundred different configurations were tested. Eventually, based on thirty years of Toyota’s hybrid heritage, the company succeeded to develop a hybrid electric vehicle (HEV) dedicated to mass market. Seven months later after Prius was launched in 1997 in Japan,

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Toyota’s President Mr Hiroshi Okuda announced that his group would begin exporting 20000 units annually to North America and Europe starting in 2000. In early 2010, world sales have attained more than 1.5 million cars. Is Prius project a success? Financially speaking, considering the first steps of the magnitude of initial investment into the project from the early nineties until the early 2000s, it is questionable. However, as of 2003-2004, when Prius II was launched in the world, it took the road to commercial success. Not only profitable, Prius project has also brought to Toyota a sustained competitive advantage in terms of ability to innovate in hybrids, to address the segment of “green” consumers in Japan, in Europe and in the US. Furthermore, Toyota has improved the impact and attraction of its brand image. •

A break-up strategy based on partnerships to make business models more agile: Renault-Nissan with Better Place

After having experienced electric vehicle in the seventies in partnership with EDF17, Renault reinvested massively into EV in 2008 following four recent trends: growing environmental interest of consumers, demonstrated success of Prius, the limited future growth of the European car markets, and the recent technology improvement, linked to an increase in battery performance allowing an autonomy of 160 km (instead of 60 km in the past). Before the EV in 2007, Renault set up a new label called eco2. It aimed at leading customer’s choices towards cars that were integrating three different environmental criteria: • • •

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CO2 emissions lower than 140g/km or biofuel use manufactured in ISO 14001 certified plants 95% of car should be reused at the end of its lifecycle and it should contains 5% of recycled plastic material

However, Carlos Ghosn, who gradually took over Renault-Nissan CEO position from 2005, wanted to be market out by a much more innovative project than an eco-label. The meeting with Shai Agassi, Better Place founder-CEO in January 2007 upon the strong recommendation of the Israël President Shimon Peres, was the ideal opportunity for Renault-Nissan to move quickly into EV. What are the specificities of the Better Place company? It defines itself as a global provider of EV network and services. Shai Agassi got a simple idea: instead of reloading battery for EV which is time-consuming for the driver, it is much more efficient to change of battery. Then battery is not considered as part of the vehicle itself that solves the discontinuity of service issue. How Renault can integrate the new model suggested by Better Place into its own strategy? Instead of investing in hybrid solutions and trying to directly compete with Toyota Prius and other competitors models, it seems more coherent with Renault history to use its past experience in EV with EDF, especially by sharing risks between the diverse project stakeholders: battery, reloading system, electric infrastructure, EV construction, etc. In early 2010, more than 40 partnership are ongoing (power companies, governments, cities,…). Renault has also a specific advantage in setting up partnership like the Alliance with Nissan has shown. Alliance between Nissan and Renault was set up in 1999. After a decade, Renault held 44,3% of Nissan and Nissan held 15% of Renault. The aim of the Alliance consists in implementing industrial and commercial partnerships through different projects; EV is one of them. Nissan invested in ion-lithium battery through its JV with NEC and Renault invested in EV itself. Renault and Nissan invested together more than 600 millions euros in 3 years. Infrastructure and reloading systems should be the responsibility of other stakeholders. Better Place is one of them. Altogether, from 2008, Renault-Nissan and Better Place have signed partnerships with different gov-


ernments: Israël, Denmark, Portugal, California, Hawaï, Ontario, etc. First EV cars are planned to be sold in 2011 in Israël where infrastructures and networks are to be installed and managed by Better Place by 2011. Through those investments in EV, Renault-Nissan is aiming at becoming the first car manufacturer which offers 100% EV massively. Much more than mastering the technology, Renault-Nissan will be able to apprehend the whole value chain from car conception and manufacturing to its use by customer: •

•

Whereas with internal combustion engine, close partnership with oil industry was key to innovate, with electric car, new relations with new partners should be create. The most innovative point of Renault-Nissan EV project does not lie in technology but in innovative partnerships with battery providers, utilities, government, etc. Whereas with internal combustion engine, a customer need to go to an oil station more or less regularly, with EV projects a driver would dispose of several options to reload power according to the use of the car. Renault-Nissan is to develop three ways to reload one’s own EV: “We’re looking at three possibilities. First, recharging at home, or “standard” recharge, taking from four to eight hours. The best time to do this is at night, so the next morning your car is fully charged and ready to go. The second possibility is taking your car to a rapid recharge station, where recharges will take 20 to 30 minutes. The third option is an original by Renault, consisting of battery exchange stations called “quickdrop”. It will be a little like driving into an automatic car wash, only the machine will remove your car’s battery and replace it with another. And in three minutes you have a fully charged battery”. It appears that car manufacturers are now extending

their value chain, may discover new kinds of competitors, and may capture new kind of profit either with technology, either with infrastructure.

Car Industry Transformation Involves a New Conception of Mobility and City Deployment The first step to envisage carbon transition within car industry consisted in investing in new technologies and in showing it. With EV, HEV and other kinds of car models, technological solutions are highly diverse. The diversity of potential technological solutions makes risks higher for actors that would choose to specialise on one technology. Different ways have been explored to prevent from taking inconsiderable risks: •

•

•

Diversifying investments as German car manufacturers do: Volkswagen, Daimler, and BMW. Investing in one technology18, mainly like Renault, which has focused on 100% EV technologies, and Nissan that has been targeting ino-lithium battery since 1982. And then, find a partner to cooperate and pickup the optimal solution (that is what both of them do since 1999). Focusing on a technology that is little investigated by others, as Honda is doing with hydrogen. In 2008, Honda proposed a first vehicle based on hydrogen, FCX Clarity, in California and Japan.

In all cases, the need for cooperation appears in the long-term to satisfy customers and enable inter-operability. The European Commission issued a Green Car initiative in late 2009 to avoid that car manufacturers lower their investments in green car during the economic down-turn, to incentivise them to invest in smart-grids for electricity distribution, to facilitate credits from banks and risks-sharing with partners.

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Cooperation should also be a way to display one’s strategy in front of competitors and stakeholders in order to enable different strategies to emerge within a representation of the future based on a low carbon economy scenario. The World Business Council for Sustainable Development Project “Mobility” is one of example of this kind of cooperation. If technology is crucial to cope with carbon transition, the real issue is much broader than technological. In 2010, people living in urban areas represents over 50% of the world population. By 2030-2050, this ratio is expected to grow up to 70-80%. The strongest expansion to urbanisation will come from China and India, and even more largely from emerging countries. At the same time, oil reserves are likely to reach a limit and to decline. Innovation in terms of partnerships and ability to cooperate with non-classical partners is crucial. Partnership with oil company in R&D decision within car industry should be progressively forgotten. Nature of partners should change: architects and urban planners as partners seem to be much more relevant to anticipate the insertion of cars in the future city. Cooperation with local players from emerging countries especially China and India will be a key advantage considering that more and more innovations will come from those markets, which are already driving costs down. Vijay Govingarajan, with Jeffrey Immelt, GE CEO, already mention the notion of “reverse innovation” to explain that Western markets are becoming an extended market of some innovations which have been already implemented in emerging countries locally. Chery from China, that has just bought Volvo in late 2009 and Tata in India with the Electric Nano are to be serious competitors in Western markets in the coming decade. Nevertheless, the ability to stabilize technological solutions fitting urban context will make the difference: urban challenges in Mumbai are not Paris’ones. For example, in Paris, a system of public service for bikes with stations all over

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the city has been set up. EV development in Paris should take into account Velib’success. In terms of corporate strategy, car manufacturers will be able to capture margin where it seems the most profitable, through partnerships and operational experiences with other players along the new value chain (from conception to car end of life and re-use). As an example, battery business seems to be a future Eldorado, as long as one does not take the risk to fail at the very beginning. Car manufacturers have direct interest to keep a close look at the technology without investing too much in it, but rather stimulate other players to do so. Once for the most efficient solutions to emerge, they can buy or cooperate with the emerging player. Hence cooperation to market EV, HEV and other solutions is likely to be the key to success for future car industry business models. Whereas during the whole XXth century, cars were assimilated to speed and performance, XXIst century may need a new imaginary axis based on environmental-friendly values. Successful EV manufacturers will be also able to create that new imaginary environment to attract customer out of “combustion society”. A good image is a condition to attract customer out of the path of “car-as-usual”. The fact that China refused to buy Hummer considering that it has no bright future is significant of how shareholders are valuing the goodwill of car manufacturer.

CONCLUSION Traditional strategic approaches based on competitive market environment analysis are increasingly challenged. In particular, the political momentum around global environmental issue (such as climate change) aspires to transform the traditional fossil-fuel based-economy into a low-carbon and sustainable world.. Businesses adopt a large set of strategies in a wide spectrum comprising “green washing”,


pure compliance to environmental standards, implementation of incremental changes to adapt to emerging trends (regulation or consumer’s expectations), and in few cases, more radical strategies and ruptures in the business. In this case, the aim is to modify industry’s rules in a continuum through the reinsertion of the business into a broader socio-eco-political context. These strategies are influenced by several internal (organization, leadership, etc.) and external (stakeholders pressure) factors, that provide different signals and incentives for these businesses to envisage a more or less radical transition to a low carbon economy and translate this perception into action. Businesses will shape their green strategies as a result of objective and perceived influence of: •

•

•

•

Consumer’s preferences: the type of targeted buyer market and its capacity to evolve to absorb green products (with or without price premiums) New entrants pressure: to this respect, emerging economies such as India and China are restructuring the landscape and provide one of the main driver for a quick adaptation of existing occidental business models to the new reality of the global economy. The oil case and automobile case illustrate this very well: oil demand increase in the future will be mostly driven by China and India19 The car market expansion will also takes place for a large part in developing countries. As regards the sportswear industry, these two emerging economies have a strong influence on the delocalisation of the supply chain to localisation with lower production costs. NGO and civil society pressure to take into account environmental considerations and influence a shift in business Shareholders pressure: and how they succeed or not to balance financial criteria to target long- term profitability over shorterterm maximization

• • •

•

The weigh of assets and the capacity to redeploy them on the short and longer term Unions and employees influence on business reconfiguration Relationship with suppliers: and the capacity to weigh on them to re-orientate the supply-chain organization or production to greener considerations Regulatory existing pressure and evolution, leading to more or less mandatory reintegration of environmental concerns in business

Unsurprisingly, strong shareholder influence is a common denominator in all sectors, to this respect, any green innovation is supposed to yield profit according to traditional profitability criteria. The impulse of a single manager conviction is also often a significant transformational driver. It enlightens the importance of managerial considerations in the way to conceive successful green strategies. •

The outdoor sportswear companies have envisaged the transition as an apposition of green consideration over the perimeter of activity they mastered the more effectively. The drivers to change were their perception of the market evolution towards greener products, the emergence of clusters such as the industry federation and NGOs pushing for increase environment reintegration, and in some cases, internal leadership. These influences led to strategies to reduce impacts of corporate activities and to some extent, the improve product specifications (with the incorporation of recycled or organic material). However, the capacity to move massively to eco-design products taking into account the whole life-cycle would imply to weigh on the supply chain to profoundly reshape it. It would rather come from a conjunction of efforts within

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•

•

26

the industry rather than from a single actor’s influence. The oil sector considers the low-carbon transition in a quite conservative way, leading to strategies that remain highly path-dependent. The social and regulatory pressure and, in some specific cases, internal leadership convictions have pushed oil companies to diversify activities and invest in alternative energies, including renewable power production. However, many other factors act as pull-back forces backing a conservative vision of the transition: prospects for strong demand pulled by emerging economies, heavy capital assets, huge profits, no global international agreement to move collectively to decarbonise the economy, etc. This created little incentives for companies to bet on a massive transformation of the downstream usages of oil, in particular in transport, and correlatively, to revise their core-business so as to influence the realization of a low carbon transition. Car industry are quite proactive, which is a recent trend, strengthened by Toyota success with Prius. The profitability of the Prius project led constructors to compete for the leadership to seize the mid and longer term opportunities linked to low-carbon transition and post-carbon economy. The globalization of car industry’s supply chain with associated delocalizations and social concerns, the rapid emergence of China’s and India’s entrants into the markets, the growing volatilities of raw material and oil prices had a decisive impact on the way Western car manufacturers conceive environmental issues. The recent crisis with all difficulties encountered by US car manufacturers (the Big Three), has intensified this challenging global diagnosis. Car industry’s players operate

different kind of strategic moves: incremental (Toyota), holistic (Renault-Nissan), sharp and prospective-oriented (Honda), etc. In a whole, the diversity of business models cannot prevent car industry players from being impacted by the potential capture of margin by new players at both downstream (electricity delivery, etc.) and upstream (battery, etc.) levels. By taking environmental constrains into account in their business model, they are implicitly pushing government and regulators to help them going through the low-carbon transition and establishing new entry-market barriers for the “new guys on the block”. A Comparison of the three selected industries shows that car industry appears to be more advanced in the way to envisage the low-carbon transition compared to oil and outdoor sportswear industry. For more than three decades, car industry has indeed developed a partnership culture to be able to maintain its margin both at the upstream and downstream level along the entire supply-chain. In particular, the emergence of India and China has been decisive. It led the industry to anticipate the need to adapt to new strategic levers at upstream (suppliers) and downstream (market) levels now located in emerging economies. It pushed to move to innovations, including the EV that seems to be inherent of the transport development policy in China, mostly to answer energy security and health issues than in anticipation to a low carbon economy. Car industry has been more proactive to develop innovative low carbon technology. If it answered first the competitive pressure, some companies are now anticipating a new economic paradigm: they invest not only on technology but also on mobility and urban considerations, with new partnerships. Car industry is starting to implement a holistic approach, whereas still incomplete and sometimes opportunist, in opposition to the oil or sportswear


that are respectively focused on the upstream and downstream segments. The latter rather envisage the future locked into a traditional representation of the constraints weighing on the sector, based on a traditional reference system. Sportswear industry’s influence on the rest of the chain was restricted to the impact of incremental strategies, like eco-branding or eco-efficiency. But they it is not massively involving their capitalistic or managerial influence to accompany the whole sector to the transition and overpass these pathdependent trends. It seems that the holistic approach of activities is a key element in the way to envisage the transition to a low carbon economy and make it happen. As regards the oil industry it would translate into a more radical anticipation of a decrease of traditional oil activities (e.g. broad expansion of EV for transport) leading to the reorientation of capital in related activities yielding new profits (petrochemical production restricted to non-substitutable oil usages, investment of capacities in low-carbon transport industry) or in brand new businesses that would seem more promising in the future. Some would say it is impossible. Whereas fixed assets have nothing in comparison, Nokia provides a good example of a company that transformed completely its core-business by moving from timber to mobile phone industry. To be holistic, green strategies now need to evolve towards more resolute “green transformations” within the industries, which would need to translate also into more radical changes in industries’ stakeholders relations, to impact resolutely companies’ operational strategies. In this context, stakeholders’ own interest would be to demand for the establishment of sound indicators to measure industries’ green performance (in the short and longer term), which would need to be taken into account in managerial performance assessments to impact the classic conceptions of profitability effectively.

ACKNOWLEDGMENT Thierry Hommel (Sciences Po); Stéphane Latxague (Surfriders foundation); Eric Dargent (Ripcurl); Laurent Burget (Mountain Riders); Gwenael Wasse (Amis de la Terre); Raphael Gerson; Thierry Koskas and Alice de Bauer (Renault)

REFERENCES Aggeri, F., Elmquist, M., & Pohl, H. (2008). Managing learning strategies in the automotive industry – the race for hybridization. Paper presented at Gerpisa Conference, Turino, Italy. Aggeri, F., Elmquist, M., & Pohl, H. (2008). Managing innovation fields: Another look at how eco-innovation capabilities are built in the automotive industry. Paper presented at the conference Strategic Management Society, Köln, Germany. Aggeri, F., & Pohl, H. (2008). Managing learning in the automotive industry– the race towards electric vehicles. Paper presented at Dynamics of Institutions and Markets in Europe (DIME) Conference, Bordeaux, France. BP. (2006). Sustainability report. Collins, J. (2002). The ultimate creation. In Hesselbein, F. (Ed.), Leading for innovation and organizing for results. J-B Drucker. Crassous, R. (2009). Joint research project: Carbon-constrained scenarios, final report. Edouard, S. (2007). Concurrence et stratégies d’entreprise. Economie et Management, 125, 22–28. Elmquist, M., & Segrestin, B. (2008). Developing innovative capabilities: Lessons from an experimental process in the automotive industry using a design theory approach. Paper presented at the European Academy of Management, Ljubliana, Slovenia.

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Elmquist, M., & Segrestin, B. (2008). Alternative design strategies to combine environmental and economic sustainability: Lessons from an empirical experiment with an automotive firm. Paper presented at Gerpisa Conference, Turino, Italy. Elmquist, M., & Segrestin, B. (2008). Organizing open innovation in practice: A case study of an environmental innovation project in the automotive industry. Paper presented at International Product Development Management Conference, Hamburg, Germany. European Commission. (2007). European energy and transport, trends to 2030—update 2007, report. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman. Fréry, F. (2000). Un cas d’amnésie stratégique: L’éternelle émergence de la voiture électrique. Paper presented at IXème conférence internationale de management stratégique, Montpellier, France. Geroski, P. A., & Markides, C. (2005). Fast second. How smart companies bypass radical innovation to enter and dominate new markets. San Francisco, CA: Jossey Bass. Godard, O. (1995). L’environnement, du champ de recherche au concept-une hiérarchie enchevêtrée dans la formation du sens. Revue Internationale de Systémique, 9(4), 405–428. Godard, O., & Hommel, T. (2009). La gouvernance du développement durable. Regards sur la Terre. Grandval, S., & Soparnot, R. (2005). Le développement durable comme stratégie de rupture: Une approche par la chaîne de valeur inter-sectorielle. Revue management et avenir, 3(5), 7-26. IEA. (2007). World energy outlook 2007 China and India insights. Immelt, J. R., Govindarajan, V., & Timble, C. (2009). How GE is disrupting itself. Harvard Business Review, (October): 2009.

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Itazaki, H. (1999). The Prius that shook the world-how Toyota developed the world’s first, mass-production hybrid vehicle. Nikkan Kogyo Shimbun Ltd. Kim, C., & Mauborgne, R. (2005). Blue ocean strategy: How to create uncontested market space and make competition irrelevant. Harvard Business Press. Kolk, A., & Levy, D. (2001). Winds of change: Corporate strategy, climate change and oil multinationals. European Management Journal, 19(5), 501–509. doi:10.1016/S0263-2373(01)00064-0 Martinet, A. C., & Reynaud, E. (2001). Shareholders, stakeholders, et stratégie. Revue Française de Gestion, 136, 12–25. Martinet, A. C., & Reynaud, E. (2004). Stratégie d’entreprise et écologie. Edition Economica. Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). Stragey safari: A guided tour through the wilds of strategic management. New York, NY: The free press. Nidumolu, R., & Prahalad, C. K. (2009). Why sustainability is now the key driver of innovation. Harvard Business Review, (September): 2009. Orsato, R. J. (2009). Sustainability strategies. Palgrave MacMillan. doi:10.1057/9780230236851 Pohl, H., & Elmquist, M. (2008). On the way to electric cars-a case study of a hybrid electric vehicle project at Volvo Cars. Paper presented at R&D Management Conference, Ottawa, Canada. Porter, M. (2009). What is strategy? Harvard Business Review, (March): 2009. Porter, M. (2009). How competitive forces shape strategy. Harvard Business Review, (March): 2009. Porter, M. E., & Kramer, M. R. (2006). Strategy and society. The link between competitive advantage and corporate social responsibility. Harvard Business Review, (December): 2006.


Total. (2007). Rapport, environnement, et société. WBCSD. (2005). Toyota environment and hybrid, case study.

KEY TERMS AND DEFINITIONS Alliance (The): Name given to the capitalistic alliance between Renault and Nissan in 1999. Business Model: A document which describes the rationale of how an organization generates financial value. Business As Usual (BAU): The normal course of some activity. A Business as Usual Scenario is a scenario is a scenario prolonging past trends. Differentiation: Term used by Michael Porter to specify his “generic strategies”. Differentiation is a strategy which is based on the uniqueness of a product within the cope of an industry (compared to a market). Emerging Countries: A country which enters into a process of rapid growth (> 5% growth/year). Focalization: Term used by Michael Porter to specify his “generic strategies”. Focalization strategies only deal with market segment. Kyoto Protocol: Is an international agreement linked to the United Nations Framework Convention on Climate Change. It sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas emissions. These amount to an average of five per cent against 1990 levels over the five-year period 2008-2012. Low Carbon Transition: Development of economic, social, political (…) pathways to curb greenhouse gases emissions by 2050, compatible with an ambitious target to limit temperature increase in the longer-term (2°C above predindustrial levels). ISO 14001: International standard for environnemental certification. It provides a framework defining the rules to reduce corporate environ-

mental impacts related to processes, products and services. WBCSD: The World Business Council for Sustainable Development (WBCSD) is a CEOled, global association of some 200 companies dealing exclusively with business and sustainable development. The Council provides a platform for companies to explore sustainable development, share knowledge, experiences and best practices, and to advocate business positions on these issues in a variety of forums, working with governments, non-governmental and intergovernmental organizations.

ENDNOTES 1

2

3

4

5

6

7

8

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I.e. stabilization of the temperature increase at 2°C by 2050. global network created in 1990 in Europe by surfers to protect surf spots from local pollution. promote education on environment and mountain protection. promotion of environmental protection (mountains and lakes). Quilsilver, annual report 2009. Ademe – Les exemples à suivre, “la demarche environnementale de Ripcurl Europe”, octobre 2008. French state agency for environment and energy conservation. REACH is the Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals. It entered into force on 1st June 2007. REACH makes industry responsible for assessing and managing the risks posed by chemicals and providing appropriate safety information to their users. Grenelle de l’environnement (“France’s Environment Round Table) was initiated by the President Nicolas Sarkozy. For the first time, a government gathered civilian and public service representatives together

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10

11

12

13

14

15

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around the discussion table, thus forming 5 colleges (the State, unions, employers, NGOs and local authorities) to define the key points of government policy on ecological and sustainable development issues for the coming five years. When CH4 co-product of oil extraction is burned into CO2. The GCC was created in 1989 and gathered the major fossil fuel users and producers to lobby congress to prevent regulatory measures. John Browne in BP Sustainability Report 2006. see Novethic 01.12.2010. see interview of Christophe de Margerie in Total, Rapport environnement et Société, 2007. “Scenarios for transition towards a lowcarbon world in 2050: What’s at stake for heavy industries?” (Fonddri/EPE) provides a representation of the worldwide primary energy mix in 2050 under strong carbon

16

17

18

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constraint. In this example, fossil fuels account for around 60% of the primary energy supply in 2050. In absolute terms there is however a major difference: the primary oil consumption in 2050 in the low carbon scenario accounts for 40% of primary oil consumption in the BAU scenario. 2007 figure - IEA key world energy statistics 2009. EDF is the French leading electricity producer. Other technologies, including hydrogen solutions are kept in research scope but the devoted amounts are not of the same magnitude as for investments in EV. The Alliance Renault-Nissan enables the companies to diversify risks and benefit from their complementary global market coverage. More than 40% of the increase in world demand according to tendencies; see as illustration, the reference scenario IEA, WEO 2007.

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Chapter 2

Environmental Standardization for Sustainability John W. Bagby Pennsylvania State University, USA

ABSTRACT It is axiomatic that environmental controls are expressed as environmental standards, a traditional driver of investment in pollution control. Environmental standards spur investment in green technologies that promise to stimulate sustainable business models. The institutional framework of environmental standardization is complex; a widely misunderstood political process. A variety of standardization activities have impacted environmental protection historically and are now poised for further growth as green market discipline proliferates. Environmental standardization is a unique fusion of technology design and public policy development involving various constituencies: environmentalists, technologists, legislatures, regulators, standards-setting bodies, upstream suppliers, downstream users, and society’s affected communities. This chapter reviews the role of standardization activities in setting environmental constraints, in the development of green technologies, and in establishing metrics for environmental certification and monitoring. The implications of managing environmental standardization to attract financing for sustainable business models are so significant that disregarding the risks of environmental standardization imperils competitiveness.

INTRODUCTION Generally it is recognized that environmental controls are expressed largely in environmental DOI: 10.4018/978-1-60960-531-5.ch002

standards emanating from governments (regional, national, provincial, local), from industry associations and also have been developed from private contracts. Environmental standards serve as the traditional and most forceful driver in design, development and deployment of pollution con-


Environmental Standardization for Sustainability

trols. Standards attract professionals and firms engaged in development and administration of environmental testing. Standards underlie the deployment of sensor networks for environmental monitoring. Standards also drive the development of attestation programs that administer environmental certifications. In the future, environmental standards are poised to spur investment by firms pursuing business models for sustainable growth and green technologies. Therefore, environmental standards lie at the heart of financing green, sustainable and environmentally-aware technologies as well as their deployment in potentially successful business models by a wide variety of firms throughout the world. Despite the prevalence of environmentalrelated standards, the institutional framework for environmental standardization remains a complex and widely misunderstood political process. Standardization is a unique fusion of technology design and public policy development involving various constituencies: industrial and transportation firms, environmentalists, technology developers, legislatures, regulators, standards-setting bodies, upstream suppliers, downstream users, and the affected communities in society. International treaties and accords increasingly obligate nations to implement environmental design through pollution controls as well as establish metrics for testing, monitoring, and certification. Given the political difficulties of achieving multi-lateral consensus on detailed environmental standards through national legislative or regulatory bodies, environmental standardization will be undertaken in a wide variety of venues, both governmentrelated and industry-related. This chapter provides a unique perspective on the implementation of government-inspired environmental standards to drive sustainability in these varied venues, standards-setting organizations (SSO), hereinafter standards development organizations (SDO). While much of this chapter’s focus is on the environmental standardization experience of the United States, the experience

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of the U.S. is predicted to affect standardization in other nations and in international environmental SDOs. Therefore, examples of international standardization are also presented to illustrate the complexity of environmental standardization. The active, successful management of environmental standardization activities are essential to the development of sustainable business models in all aspects of industrial processes, transportation, green finance and third party environmental monitoring and certification. Many of these firms will operate in various nations and their products will be produced and marketed in other nations. Disregard of the risks of environmental standardization will significantly imperil the competitiveness of environmental industries because the measurement of compliance with environmental-related standards is the quintessential evaluation criteria for acceptable sustainable designs and green performance. This chapter is organized to provide a logical development of the standardization process in general then moves to acquaint the reader with the legal and regulatory difficulties encountered by standardization, such as in the areas of antitrust, intellectual property (IP) and democratic principles of public participation. Standardization examples from environmental fields are integrated throughout as are classic standardization precedents from other fields. Finally, the chapter concludes with a capstone discussion of emerging issues for research and practice in environmental standardization.

BACKGROUND The industrial revolution of the nineteenth century was among the most disruptive forces in economic history (NAS 1995). The green revolution for sustainability may be similarly disruptive because both the industrial and green revolutions are transitions with similar consequences: a robust global economy was enabled largely by reduction of variety compelled by standardization


of interchangeable parts, production processes, information and communication (Bagby 2010). Environmental standards will likely duplicate this new revolution in two linked ways. First, environmental standards create disincentives for negative externalities (pollution) of products and processes by incentivizing research and development (R&D) into designs compliant with environmental control standards. Second, the network effects of pollution controls are enhanced by standards. Environmental control can be viewed as a system that increases in marginal value (less overall pollution) as each additional compliant actor is brought together into that network (Katz and Shapiro 1985). Consider the classic example of how air pollution control law drove environmental standards by requiring vehicle manufacturers to lower automotive emissions. This led to the suppliers of component parts standardizing their products to achieve economies of scale. For example, catalytic converters became the standard pollution control design that was financially feasible, but only after scale economies were achieved in the mass production of those standardized catalytic converters. The overall societal costs of pollution control were minimized by widespread deployment of catalytic converters. Of course, catalytic converters are an example of environmental standardization network effects because they required special fuels (unleaded gasoline). A similar modern example has been the availability of low sulfur diesel fuels that require special diesel engine technologies (blue tech). Strategic value is created when firms, industries, nations, and international regions achieve environmental standardization. Standardization defines environmental technology into fields and it incentivizes innovation. However, environmental standardization is a political process with strategic impact. Unfortunately, compliance with standards is too often viewed only as a technical task, so it is too often delegated to technical specialists who are without strategic responsibilities. Standardization should be viewed strategically by firm managers, governments, the affected public and

other industry participants. This indifference to the importance of standardization is exacerbated because standardization is not considered as a coherent field and the definitions of standards are imprecise and field-specific. For the purposes of this chapter, consider that standards are technical specifications that form sufficient common design elements to enable compatible or compliant products and processes. Standardization is one approach to the coordination problem in game theory in which participants benefit from harmonized decision making. Arguably sustainability might also be achieved without standardization: thousands if not millions of independent actors could each deploy different environmental control technologies making environmental standardization an unnecessarily and rigid dampener of innovation. However, it is more realistic to incentivize science and management to create similar, high quality systems so that R&D investments are focused less on unnecessary variety and more on targeted success most susceptible to efficient deployment. Thousands of compelling examples illustrate how standardization assists in developing new markets and new products, enhancing quality of life, creating competition, and cutting costs. Indeed, even the written and published standards themselves are a key information infrastructure. For example, information about environmental standards simplifies the management of environmental and compliance risks. While the standardization experiences of many technologies are relevant both to an understanding of strategic standardization as well as to pollution control and measurement, most examples used in this chapter specifically address environmental standardization. Nevertheless, consider how the seemingly irrelevant transportation interconnectivity example in the next section addresses the expansion of networks and shows how information technology (IT) is cross-cutting to many fields of standardization. This example actually illustrates the significant environmental impact from standardization in seemingly unrelated fields.

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Standards Reduce Variety Promoting Efficiency In much of the world, transportation efficiency and the economic and strategic advantages of increased transportation mobility rest on the deployment of standardized electric railway systems. Unfortunately, dozens of legacy electrification projects create inefficiencies making standard electrification an elusive goal. The social welfare losses of pollution, domestic energy dependency on unstable foreign sources, monopoly-induced over-pricing by nonstandard equipment suppliers, national boundary barriers to efficient travel, and loss of economies of scale would all be addressed with more efficient transportation systems (Gandal and Shy 2001). Consider how electric traction power systems for use in European rail systems include both AC and DC currents, there are voltages at various discrete values ranging from 750 volts to 25,000 volts, and the AC frequencies in use range from 25 through 50 cycles per second. Furthermore, there are different physical power distribution technologies including one and two conductor overhead catenary wires and third rails, often with differing geometric sizes and separation distances. European rail lines encounter incompatibility making the achievement of efficiencies from standardized systems into a daunting and costly task that ultimately has impeded the diffusion of efficient electrified railroad networks. Differences between various nations’ electrified railroad standards are anticompetitive, creating an inefficient variety of rolling stock, costly differences in locomotives as well as generation and transmission networks and societal losses from a lack of economies of scale production of standardized equipment. Furthermore, this system has favored first movers and local suppliers with advantages allowing them to enjoy near monopoly pricing. This is arguably a nontariff barrier to international trade. Today, much of this inefficient variety can be addressed with standardization of computerized power

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control systems. These enable the installation of adaptive systems to locomotives so they can run more efficiently over the variety of incompatible, nonstandard power distribution systems (Jane’s 2003). Indeed, IT innovations may prove to be crosscutting to environmental technologies in other important ways. Environmental standardization holds promise to enhance sustainable technology development and deployment by retarding costly monopolies, enabling competition, reducing the costs of environmentally sensitive products and services. The ultimate social welfare benefits to society will include increased availability of environmentally friendly products and services (Farrell and Saloner, 1985). Thus environmental standards arguably manage environmental risks better than almost any proliferation of variety.

Standards Manage Many Forms of Risk As the railway electrification example above illustrates, the choice to encourage variety through robust R&D vs. the choice to standardize by narrowing the range of variety, is a tricky problem discussed more fully below. Provisionally, consider that R&D encourages useful innovation into practical solutions until some variety is achieved. If standardization is achieved too soon, then further innovation is often retarded such that alternative systems and methods are adopted less aggressively. By contrast, if excessive variety is achieved, then, too often, this retards meaningful deployment, enables costly monopolies and raises societal costs of incompatibility. Competition generates both imitation, a form of de facto standardization, and variety. Societal welfare is enhanced by competition unless interoperability, safety, and quality are compromised (Farrell and Saloner 1985). The elusive dilemma of standardization is how to balance the societal benefits of competition-inspired variety against the cost savings of competition once variety is reduced and


effective design is achieved. This tipping point remains the most compelling standardization research question and exists in nearly all fields. After this tipping point is reached, standardization becomes a useful strategy for risk management. Risk includes the potential for negative impact from vulnerabilities threatened by future events. Standardization can reduce those risks from both predictable and unpredictable events when these risks jeopardize product quality, product failure, quality of professional services, health and safety, environmental protection, firm operations, financial flexibility, legal rights, political influence, competition, labor and employment, and resource or commodity availability. Many of these risks impact the development of sustainable business models for environmental protection.

TYPES OF STANDARDS The imprecise classification of standards contributes to misunderstanding. This section provides some structure to this classification scheme to further understanding of standards development activities (SDAs) and their relationship to environmental standardization. Standards emanate from various sources and are developed in three primary ways. First, a de facto standard arises when a proprietary technology achieves broad market success. Second, de jure standards are generally imposed by legislation or are developed by government regulatory agencies that have domain expertise in the field standardized. For example, most pollution emissions control requirements are de jure standards because government regulators with expertise in environmentalism are authorized by statute to promulgate emissions controls as de jure standards. Third, voluntary consensus standards (VCS) arise increasingly in private-sector venues known as standards development organizations (SDO). For example, VCS standardization is often developed by industry participants. When these VCS standardization efforts are more

limited, such as when they arise ad hoc and the SDO disbands when completed, they are generally called consortia (Albert and Burke 2004). De jure standards generally constrain everyone while de facto, consortia, and VCS standards are voluntary for those who choose to participate. Of course, the choice not to participate may be illusory because some standards achieve critical mass and monopolize an activity. For example, it would be difficult and costly to achieve wireless local area communications in environmental sensor networks without complying with the IEEE 802.11 standard. Sometimes de facto standards are considered informal standards because they are not developed or imposed by recognized governmental or professional standards bodies. When a proprietary standard becomes widely used or even dominant, it becomes a de facto standard. Free and competitive economies regularly rely on de facto standards because they encourage liberty essential to democratic societies. No direct endorsement from an SDO or government regulator is needed for a de facto standard to achieve critical mass because widespread successful product sales cause it to become the standard. While de facto standards are common in many unregulated products such as computer operating systems and other information and communications technologies (ICT), they are less prevalent for products and services that have direct and strong impact on health and safety or the environmental. Still, monopolists strive to dominate markets with by setting de facto standards through competitive success for their products. There are democratic process problems with proprietary and de facto standards because they lack political checks and balances before they are imposed (ex ante). Furthermore, some de facto standards are also closed standards because they are neither transparent nor fully accessible permitting the owner to discriminate against users. As with other dominant standards, de facto standards generally impose high switching costs

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thus locking users into the standard and retarding future innovation. De jure standards are considered formal standards because they are created by law in legislation, regulations, or are set in tribunals such as by court precedents. These are principled standards imposing mandatory requirements with the force of command and are created by a legitimate authority. Typical examples include de jure standards from the U.S. Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA). Similar programs are present in most industrialized nations. Occasionally, accredited nongovernmental bodies set standards that eventually become de jure standards when government officially recognizes or adopts them. For example, building codes are developed by industry but are then frequently adopted by provincial or local governments to guide building construction. Building codes have had substantial environmental impact. Many pollution and emissions standards are de jure because de facto, consortia, or VCS standards might not provide adequate protection, failing under public policy scrutiny. Consider the 2010 BP Deepwater Horizon oil spill in which the oil industry itself set many of the standards for wellhead blowout protection, emergency response and spill cleanup procedures. Under U.S. administrative law, that the incident will likely cause to be adopted by other nations, regulatory agencies must develop de jure standards internally if VCSs are impractical, fail to serve the agency’s program needs, are infeasible, would likely be inadequate, ineffectual, or inefficient, or are inconsistent with the agency’s mission. Thus, government de jure standards are more appropriate if the enabling legislation requires regulatory decisions not solely influenced by direct pressure from the industry regulated. Under rules of the U.S. Office of Management and Budget (OMB), regulatory agencies must exercise standards-setting judgment independent of regulated entities where the regulator must determine “the level of acceptable risk;

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setting the level of protection; and balancing risk, cost, and availability of technology in establishing regulatory standards” (OMB A-119 1998). Thus, U.S. law would likely prohibit a regulatory agency from adopting de facto or VCS standard in safety and environmental protection situations because the enabling statute would require standards to be stricter than prevailing industry best practice. Nevertheless, environmental standards apart from de jure emissions limits, such as in certification, metrology, monitoring and environmental management, are likely valid if arising de facto or when developed in VCS venues. Consider how the hydraulic mining innovation became a more effective version of placer-style individual “panning for gold” to become the de facto standard for large-scale gold extraction during the nineteenth century’s California Gold Rush (D.A. Smith 1987). Eventually, environmentalists discovered that this method had such a devastating effect downstream on watercourse users and agricultural interests, that de jure standards were developed, initially under court precedent, to minimize these negative externalities (Woodruff v. N.Bloomfield Gravel Mining 1884). Voluntary consensus standards (VCS) can anticipate compliant products or services (Cargill 1989). VCSs are frequently created ex ante in notfor-profit, non-governmental venues, sometimes organized as ad hoc consortia but also as more enduring voluntary consensus standards bodies (VCSB). Among the participants in VCS standardization there may be included: the primary industry, its upstream suppliers and downstream users, government regulators, and various national delegations. The breadth of affected parties arguably makes VCS standardization processes into a hybrid form combining both de jure and de facto characteristics. As discussed, below, increasingly, VCS process rules include at least a minimum of political participation checks and balances. These are required in the U.S. and in some international standardization venues, such as the ISO. However, VCS rules face the practical problem of attracting


Figure 1. Standardization life cycle

major players into standardization. Excessively tough VCS rules might deter the major players who must intimately participate in standardization as a design process because such key players typically share their expertise to assure success for the standardization effort (Umapathy, et, al. 2008; Weiss and Cargill 1999).

LIFE CYCLE ANALYSIS FOR ENVIRONMENTAL STANDARDS A life cycle analysis is an appropriate tool to analyze standardization, just as life cycle analysis is key to a fundamental understanding of: markets; particular products and services; the development of complex systems, processes and software; and many environmental matters. The insights derived from life cycle analysis permit holistic system assessment to avoid omissions, identify critical path efficiencies, monitor performances at each phase, assure functionality of all links connecting phases, and to optimize the SDA’s impact. This is particularly important because most all SDA share

common sequences as applied to most fields of endeavor (Bagby 2010). The standardization life cycle first commences with the identification of a need. For example, pollution provokes emissions standards, monitoring requirements provoke testing equipment standards and sensor metrics, cap and trade emissions trading provoke standards for transparency of smooth functioning emissions markets, and the like. In the second stage, participants are attracted to the SDA which defines the scope of the standardization activity. Choices are made by consensus or following first mover leadership to pursue one or more of the forms discussed above: de jure, de facto, consortia, and/or voluntary consensus. When VCS or consortia venues are used, one or more venues may compete for the standardization activity. In extreme cases, standards wars may be waged. Consider the diffusion of green building standards. In the early 1990s, individuals established the U.S. Green Building Council (USGBC) to identify and satisfy the need for environmental building standards with the Leadership in Energy and Environmental Design (LEED). Since that time, competing green building SDOs

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have proliferated worldwide and their standards compete, including, e.g., the National Green Building Program of the National Association of Home Builders (NAHBGreen); Green Globes of the Green Building Initiative; and International Green Construction Code (AIA, ASTM Int’l.). (Swope 2007). The third phase of the standardization life cycle is the actual development of the standard, essentially a design exercise through a complex interplay among three forces: design, sensemaking, and negotiation (Mitra, et.al. 2005). This is the DSN model which recognizes the complex and different roles played by various participants, such as: advocate, architect, bystander, critic, facilitator, guru, or procrastinator (Umapathy, et.al. 2010). During the SDO’s development process, the participants engage in: setting the project scope, composing and making proposals and counter-proposals constituting an anticipatory design, analysis of draft standard impacts (sense-making), negotiating revisions, coalition building to attain consensus and final approval through various democratic processes (e.g., voting) (Fomin, Keil, & Lyytinen 2003). In the fourth phase, the standard is “reported out” and published, urging adoption either implicitly or explicitly. During the fifth phase, compliant products and processes may be developed and produced leading to the development of markets for these products and processes. Conformity assurance processes (e.g., certification, monitoring, metrology, accreditation) are developed and deployed. For example, certification under many green building standards involve the award of points for siting; efficiency of design, water and materials; expected energy use; indoor environmental quality; operations and maintenance. Finally, as technology advances, the standard is reconsidered by evolving markets, SDOs or regulators where pressures of alternative competitive designs is felt. This reconsideration can force the revision or abandonment of incumbent standards as society’s needs change and markets force the even-

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tual decline of mature products compliant with the standard in question, perhaps even the development of superior substitutes.

CHARACTERISTICS OF STANDARDS The compliance tolerance of standards is important to a grounded understanding of standardization’s impact on business models for sustainability. From this perspective, the autonomy, specificity, and precision required by various standards can differ. The variance the standard permits is a measure of the tolerance of compliant systems to variations inside and outside allowable limits. This characteristic of standards is measured by both functionality and by conformity assessment. Consider how some standards permit a wider tolerance for compliance than do other standards. For example, a nearly infinite variety of designs are possible for consumer electrical devices. These devices in Japan and most of the Western Hemisphere work well within a 10 volt range of 110 volts to 120 volts. Some devices continue working above or below this range (e.g., incandescent bulbs brighten or dim). These are more flexible standards because they have wider boundaries that envision a more forgiving range of variance. By contrast, some other electrical devices become inoperable or are damaged when supply voltages are outside the allowable range (e.g., florescent bulbs) illustrating that some standards require product compliance within a much narrower tolerance range. For example, AC power conditioners and surge protection devices may be needed to protect personal computer equipment from damage. The now widespread conversion of household lighting from more voltage variancetolerant, but less efficient incandescent lighting to less voltage variance-tolerant, but more energy efficient florescent lighting illustrates the ongoing challenges of environmental standardization. Of course, in order to quickly achieve critical mass from widespread consumer acceptance of low


wattage spiral florescent bulbs, they were designed to be compliant with the nearly century old “Edison Screw” E26 base, a 26 mm right-hand threaded AC connector compliant with IEC Standard No. 60061-1 (7004-21A-2). Some standards are intentionally vague, drafted more like general guidance, so they can still be successful if the system would not suffer immediate, obvious or catastrophic failure with minor noncompliance. Indeed, in some domains, the standards must tolerate predictable variation in expected activities such as where strong public policy pressures force such standards to allow wider acceptable variations to encourage more effective or efficient compliance. Management process and financial disclosure standards are classic examples of standards satisfied by wide tolerance ranges. For example, there are three broad categories of audit and accounting compliance variance in financial reporting: rules-based, principles-based and principles-only. Rules-based standards are strict in this spectrum of compliance variance - often expressed in precise language so they permit less flexibility. On the other end of this spectrum are principles-only standards for which compliance is arguably easiest because they are vaguely expressed. A middle-ground approach, known as principles-based standards, are behavioral standards that depend heavily on professional judgment. Thus, when accounting or audit standards are rules-based, they may require more costly and stricter compliance. When principles-only standards are used, they provide much less structure and encourage easy compliance or adaptation to very different lines of business and business models. Finally, when principle-based standards are required, there is a stronger focus on the exercise of professional judgment, thus suggesting stronger regulation of such professionals. Many international and ISO standards in environmental and industrial quality areas can be evaluated under these three categories. Standards must be distinguished by the thing or object standardized. Behavioral, managerial

process and professional standards address human activity directly. By contrast, technical and interoperability standards focus on nonhuman, nonbehavioral characteristics. Technical standards are common in the natural sciences and engineering, so most emissions standards are technical because they prescribe designs or clearly quantifiable performance measurable by scientific methods. Of course, emissions standards are only part of the environmental standards for sustainability. For example, some environmental management standards specify cradle to grave tracking, these are more managerial in character. Thus distinguishing between behavioral/managerial/professional and technical standards provides key insight into the range of environmental standards. The narrower vision of technical standards requires a focus solely on the physical properties of tangible objects. However, modern technical standards generally require repeated use of rules, conditions, guidelines, or characteristics for products as well as their related management processes, production methods and conformity assessment. Thus, technical standards increasingly include all related management system practices because technical standards increasingly define terms, they classify components, they describe procedures, they specify dimensions, materials, performance, designs, or operations, they measure quality and quantity of materials, processes, products, systems, services, or practices, they require particular test methods or sampling procedures, and they describe the fit and measurements of materials size or strength (OMB A-119 1998). It should now be clear that it will become increasingly difficult to distinguish adequately between purely technical standards and purely behavioral/managerial/professional standards. While the U.S. Office of Management and Budget (OMB) defines technical standards to include “ancillary human and management processes,” the OMB’s attempt to exclude professional codes of conduct simply confuses any clear standardization taxonomy. For example, educational standards for

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admission, performance evaluation, graduation, and certification are often described as technical standards even though they are clearly behavioral, managerial and professionally related. Similar difficulties exist for cyber security standards because they merge both IT technical standards with behavioral, management, and professional standards of cyber-security professionals who operate computer networks. (ISO 27001) Furthermore, conformity assessment combines technical standards with the behavioral and professional standards needed to practice technical standards. For example, cyber-security standards specify that IT staffs must meet educational achievement, professional examination, and personnel certification requirements. Another common characteristic of standards is the focus on intended user groups and on the purpose of the standard. The U.S. National Institute of Standards and Technology (NIST) seeks to classify standards by intended user group and the standard’s purpose. Intended user groups are likely narrow groups who must directly modify their behavior to comply with the standard. These parties have the strongest incentive to understand the technical aspects of a standard because they must fully comply in order to supply that market. These most intimate intended users generally exert some control over how the activity standardized produces side effects that will impact outsiders, both positive and negative externalities. Thus, this NIST taxonomy of intended user groups includes only those most directly impacted by standards: firms, industries, nations, provincial/local governments, and international organizations that develop and implement the standard. The narrowness of this conception of user groups contrasts significantly with the affected parties given status to participate in standards rulemaking under U.S. regulatory process. Other affected parties impacted by de jure standards may participate more fully than they would in SDA undertaken in consortia or VCS bodies. This distinction may portend potential public participation and due process

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problems for consortia-developed standards (APA 1946). Consider some common forms of standards classified by intended user group: company (inhouse) standards, developed internally by a single industrial firm and meant for internal and affiliate uses; harmonized standards - either an attempt by a nation to become compatible with international or regional standards, or under bi-lateral international agreement; and industry standards developed by an industry for materials and products related to that industry. As to intended purposes, the NIST classification scheme is also initially instructive. A basic standard has broad-ranging effects in a particular field, such as a standard for emissions that many industrial producers must follow in producing a range of products. Standardized nomenclature or terminology standards enable commerce by providing clear contract language. Test and measurement standards define conformity assessment methods that assess performance or characteristics of products or processes. Product standards specify qualities or requirements to assure they serve their intended purposes. Process standards specify method steps like a production line’s functions or operations. Service standards address maintenance or repair. Interface standards define connections (e.g., telephone, computer network) and focus largely on accurate compatibility. Data standards include characteristics for which values or other forthcoming data will specify a product, process, or service and not be misunderstood. Another standards classification approach focuses on the object standardized and relates the standard to the object’s phase in the object’s own product life cycle. This dichotomy may be described as the design or performance standards dichotomy. NIST describes this as “the manner in which [standards] specify requirements,” the classic ends vs. means approach. Design standards prescribe characteristics of the product’s components, construction or manufacture. For example, catalytic converter designs are regulated, such as containing certain materials (e.g., platinum) to


Table 1. Three tiers of environmental standardization Tier / Attribute

Traditional Standardization Classification

Typical Standardization Body

Object of Standardization

Permissible Variance Range for Compliance

Top Tier: Emissions Controls

De jure

Int’l Treaty, National Laws; Environmental Regulations

Pollutants, Products

Rules-Based/ Narrow Range Explicitly Specified

Middle Tier: Environmental Technologies & Markets

De Facto, De Jure, Voluntary Consensus Standards Body (VCSB)

Proprietary Standard; Various Regulators; VCSB, Non-Governmental Organizations

Abatement & Test Equipment: Industrial & Product Components; Trading Rights; Trading Market Mechanisms; Disclosure Methods

Principles-Based/ Medium Range Assessed by Professionals

Base Tier: Conformity Assessment, Testing Methods, Metrology, Certification, Accreditation & Monitoring

Voluntary Consensus Standards Body (VCSB), de jure, de facto

VCSB

Test Methods, Data, Professionalism, Third Party Expertise/Experience

Rules-Based/ Narrow Range Explicitly Specified (Principles-Only/ Flexible Range for Professionals)

be effective. By contrast, performance standards describe a product’s function irrespective of the particular design used, such as limiting particular emissions of hydro-carbons, carbon monoxide, oxides of nitrogen, or particulates. Thus, design standards presume the overall design provides adequate performance when using well-understood arrangements of familiar materials and components (means). Contrast this with performance standards because they are more flexible, permitting various designs so long as they achieve acceptable results (ends) even if alternative or novel designs are deployed. Thus, means-based standards presume adequacy of particular specified designs. By contrast, an ends-based standard sets performance adequacy and determines compliance later, during conformity assessment. Performance standards are results-oriented but may not achieve network effects where these are possible through specified designs. Consider how the catalytic converter design standard triggered scale economies and cost reductions after they were mass produced and this required the elimination of lead-based, highway motor gasoline to protect the design from sudden destruction. Design standards enshrine particular designs by raising

switching costs and make alternative innovations more difficult to pursue.

Three Tiers of Environmental Standardization There are three, somewhat overlapping layers or tiers of standardization that appear to dominate the scope of environmental standards development activities (SDA). This three tier analysis is useful to direct SDA resources by the public, policy makers, industry participants and members of the environmental conformity assessment communities. Consult Table 1 for visual guidance. In the top tier are largely de jure pollution control standards usually promulgated by statutory law or agency regulations. Alternatively, these de jure standards have occasionally emerged from court decisions, although this occurs largely in common law nations. In the future, it can be expected that contractual requirements and some industry self-regulation standards may also impose pollution controls. In recent years, environmental laws have also been compelled by regional (e.g., EU, NAFTA) and international trade or environmental control treaties (e.g., Kyoto Protocol). Pollution or emissions control standards are ex-

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pressed as limitations on pollutants and other toxic substances emitted by various activities such as vehicular tail pipe exhaust gases, effluents discharged into surface waters, solid wastes abandon in landfills and other similar limitations. The top tier is considered the most politically divisive because it has historically imposed the greatest compliance cost. More detailed discussion of these top tier standards as they emanate from environmental laws and regulations imposed by various nations appears in other chapters and in the broad literature of environmental law and regulation. The middle tier of environmental standards controls technologies and the technology markets; the latter is discussed more fully next. Environmental technology standards address a wide variety of machinery, apparatus, and devices that obviate, eliminate, and sequester environmental pollutants and other toxic substances. It is expected that the most progress towards attainment of environmental quality will occur in the technology markets as innovation produces pollution abatement equipment and conformity assessment processes that will attract investment into business models that support sustainability for environmental quality. While government policy makers can be expected to use de jure methods to address technology innovation markets in some situations, many of the standards for environmental technologies and markets can be expected to be produced de facto or through VCS/consortia means. This tier of standardization methods for environmental sustainability may be the most attractive for participation by the private sector to enhance the development of environmental technology markets. The base tier of environmental standardization concerns conformity assessment, testing methods, metrology, certification, accreditation, and monitoring. This tier is most appropriate for leadership by scientists, engineers and process specialists who can apply domain knowledge to the development and deployment of monitoring and measurement techniques. Participation by

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some government officials and deference to such technical standards by can be expected by some governments, particularly in the U.S. (OMB A-119 1998) (NTTAA 1996). The public record of these SDA will likely be retained for later review as the years pass and questions about the efficacy of standards, including conformity assessment methods, will themselves be exposed to performance quality evaluation, such as the controversy that has plagued cellular standards and EMF emissions. (Oshinsky 2010).

REGULATION OF ENVIRONMENTAL STANDARDIZATION The regulation of environmental SDA, initially in the U.S., but now also in the EU and Asia, necessarily involves three linked bodies of law. The first area, called “essential due process” by the American National Standards Institute (ANSI) or called “voluntary consensus process” when produced under rules of the U.S. Office of Management and Budget (OMB), recognizes that SDA is an inherently political process infused with technical design, thus making effective public participation a challenge (Rysman & Simcoe 2005). Second, standards increasingly embody new design infused with intellectual property (IP) that has produced a recent history of legal problems: hold up, infringement, and licensing complexity (Kobayashi & Wright 2009). Third, SDA are inherently collaborative activities with a long history of vulnerability to antitrust scrutiny for joint ventures, patent pooling and claims of collusion (e.g., price fixing, market allocation, licensing discrimination or participant exclusion). Links among these three major problem areas are best understood when first approached with an understanding of technology markets as well as the markets that address environmental controls (Albert & Burke 2004.


Impact of Standardization on Markets Affecting Environmental Sustainability This section introduces market structure and industrial organization concepts that are essential background to the regulation of environmental standardization. The regulation of standardization that this market taxonomy informs, will directly affect competitor collaboration because SDA intimately involves coordination among most industry and supply chain participants. At least three types of markets are relevant to the regulation of environmental standardization: (1) relevant markets impacted by collaboration for (i) products/services, (ii) particular technologies and (iii) innovation (R&D), (2) markets for emissions rights and (3) markets directly impacting operational activities for entities who must address environmental concerns such as their labor markets, factor/resource markets and the financial markets. Some of these markets are relatively unregulated (e.g., innovation markets), while others can be expected to be more closely regulated in the near future (e.g., emissions rights markets). While almost any of these markets might span international borders (e.g., emissions

control equipment systems) some markets (e.g., professional and labor) are still often bounded by national borders. The U.S. antitrust enforcement agencies, the Department of Justice (DoJ) and the Federal Trade Commission (FTC), define three market levels relevant to collaborative actions like SDA, joint ventures, IP licensing and trade association activities: (a) goods/services markets, (b) technology markets and (c) research and development markets (R&D, hereinafter innovation markets) (DoJ/FTC 1995). As depicted in Figure 2, goods and services markets are almost always relevant to a regulatory analysis of SDA. With IP as an increasing component of most technical standards and a likely component in all three tiers of environmental standards (e.g., emissions controls, technologies & technology markets, conformity assessment/ monitoring/testing) regulatory analysis of environmental SDA will likely be focused on IP, antitrust, and public participation questions. The U.S.’s antitrust focus will concentrate on industrial organization matters such as those markets dominated by monopolists. Similarly the EU’s antimonopoly focus will concentrate on how the SDA can remain pro-competitive, that is, not anticompetitive as a collusive practice leading to

Figure 2. Regulation of collaboration: The relevant markets

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monopoly or the abuse of market power. Goods markets include the final or intermediate goods produced with the technology or markets for raw materials or components used in the goods. Technology markets include markets for intellectual property (IP) or substitute technologies that are used as factors in producing goods/services. Innovation markets include markets for investment in research and development (R&D) intended to develop technologies for goods/services that do not yet exist, including the anticipatory standards requiring compliance by the goods/services. Innovation markets also include the attraction of investment into R&D for improvements and products that would address un-served geographic markets (DoJ/FTC 1995). Antitrust regulators, particularly in the U.S. where the enforcement and interpretation of antitrust law is longstanding, robust, and comparatively well-developed, will likely begin analysis by examining the price elasticity of final products/ services, in final and intermediate goods/services as well as in consumer and industrial markets. In addition to regulatory review, private parties in the U.S. may also challenge SDA or other collaborative activities. Such private rights of action are also expected to become available in the near future throughout the EU. An SDA or licensing activity would be suspect under such antitrust scrutiny if the market is already concentrated and demand is not sensitive to price changes. An in depth antitrust analysis would be necessary to determine close substitutes as well as potential competitors, which could readily adapt to enter such markets. Consumer markets include mostly final products/services that consume energy, emit pollutants, or might benefit through recycling. Industrial markets include the production of intermediate and final goods sold to business entities that abate pollution, test for emissions, and perform the actual recycling activities. For example, standards requiring licensing of Blue Tec technologies for passenger diesel engines impact final consumer goods markets. By contrast, stan-

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dards that license sulfur reduction technologies for diesel distillates, needed for compatibility with Blue Tech engines, are directed to petroleum refineries that reside in intermediate, industrial markets. When the above analysis of product/service markets is inconclusive, antitrust regulators may next turn to the analysis of technology markets to determine the competitive impact of collaborative activities like SDA. Technology markets clear transactions between sellers and buyers of IP through assignment or licensing that is separate from the products in which the IP is embodied. Technology markets also include close substitute technologies which can broaden the relevant market making it less likely that the owner of any particular technology possesses extensive market power. While the relevant market analysis of final products can fairly reliably expose transaction volume and prices as the predominant measures of market power, technology markets are less transparent due to the form of transaction often undertaken. For example, license prices are often opaque making them not easily quantifiable in monetary terms (DoJ/FTC 1995). The license price for a particular technology may not be clearly stated and this reveals no transaction volume to meter payment streams or market shares. Some SDA participants may create cross-licensing arrangements or negotiate patent pools or other forms of IP pooling in a package license arrangement that hide the contribution of any particular component technology in the package. These problems are discussed more fully below. The evaluation of innovation markets has even more challenging difficulties with transparency. Antitrust enforcement based on R&D markets is the least likely mode of enforcement. Nevertheless, when analysis is inconclusive after a focus on product/service markets and technology markets, the innovation markets may be examined. R&D/ innovation markets attract competitor collaboration in joint ventures, SDA or IP pools that would induce R&D investment to solve environmental


problems. R&D/innovation markets address the future development of technology with a view to particular new or improved goods or services. SDA that adversely impacts such innovation incentives in innovation markets would likely be scrutinized for its anti-competitive impact. Thus, it is reasonable to interpret many new sustainable business models dependant on environmental standardization will reside in both technology markets and innovation markets. As an innovation market, the SDA develops new technologies through design, sense-making and negotiation. The standardization activity itself constitutes a clearing mechanism or market that attracts innovation investment (e.g., participation, design or data contributions) then negotiates an anticipatory standard ex ante. The anticipatory standard directly impacts the final design of compliant products through the licensing, pricing and field of use constraints embodied in the standard, as focused by the SDO’s own process rules. As a technology market, the SDA evaluates component technologies from among various substitutes, sometimes competing technologies. These are complex matters made more accessible by the prominent environmental standardization example of Unocal Oil Co.’s participation in SDA concerning the reformulated oxygenated, “summer time” gasoline (RFG). Starting in the late 1980s, Unocal participated with other petroleum industry groups in the California’s Air Resources Board (CARB) development of the Phase II standard for reformulated gasoline (RFG). This CARB proceeding was convened to determine “cost-effective” regulations and standards governing the composition of low emissions RFG. During the RFG rulemaking in 1990-1994, Unocal contributed equations and data based on its own proprietary research, and these data were incorporated into CARB’s RFG standard. The FTC’s complaint alleged that Unocal misrepresented that these data were not proprietary when Unocal was actually actively seeking patent protection for these research results. After

the refinery industry serving California invested heavily to comply with the RFG standard and refiners became locked-in to compliance with the RFG standard, Unocal aggressively pursued patent infringement claims. In some cases, Unocal won royalty payment judgments of $.0575 per infringing gallon. Unocal settled the FTC’s complaint that had alleged Unocal made misrepresentations to CARB, constituting materially false and misleading statements and unfair methods of competition. The FTC alleged that the deceptive conduct permitted Unocal to obtain unlawful market power when CARB enacted regulations that overlapped almost entirely with Unocal’s IP in violation of the Federal Trade Commission Act. The settlement reduced Unocal’s contingent liabilities thus paving the way for Chevron’s takeover of Unocal. The merged company was prohibited from enforcing the RFG patents, Chevron was barred from collecting royalties, Chevron was forced to cease patent infringement suits on the RFG patents, and the RFG patents were dedicated to the public domain (In re Unocal 2005). Two other types of environmental markets are substantially driven by standards. First, the factor markets for entities that must limit emissions are impacted by standards. For example, disclosures of emissions required by environmental regulators signal suppliers, consultants, prospective employees, the financial markets and customers of entities with substantial current emissions problems or with environmentally clean profiles (Bagby, Andrews & Murray 1995). Standards for such disclosures are typically de jure produced by government regulators so SDA participation in the U.S. is limited to notice and comment rulemaking procedures for “affected parties” (APA 1946). Such procedures can vary widely among the world’s nations. Another such mechanism works primarily through the capital markets, which can exert financial discipline on publicly-traded firms when contingent environmental liabilities are disclosed and discussed. These revelations generally follow compliant disclosures made

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under standards developed by the accounting industry and securities disclosure standards of the Securities and Exchange Commission (SEC) in the U.S. (ASC Topic 410(20) 2009). Financial disclosure standards are undergoing harmonization as of this writing. The second type of standardization affecting environmental markets are rules for the emissions trading markets that clear pollution permits under various programs such as “cap and trade” or allowance auctions. Emissions markets set standards similar to those organizing other markets. Market structure standards assure efficient and fair operations, including: standardized nomenclature and instruments or units of trade (e.g., removal unit (RMU), emission reduction unit (EMU), certified emissions reduction (CER)), professionalism standards for trading representatives, standardized clearance and transaction reporting, monitoring/ audit standards for measuring, reporting and verification of compliance and emissions market liquidity standards that reassure commitment feasibility. While there has been considerable public policy debate and conceptual research into developing these market mechanisms, these remain nascent markets with much unfulfilled promise. Nevertheless, as emissions market standards are deployed, these markets will increase transactions, verify results and may contribute to meaningful emissions reductions.

PUBLIC PARTICIPATION, INTELLECTUAL PROPERTY & ANTITRUST ASPECTS OF SDA Standardization is a political process infusing design with public policy similar to the constraints imposed by law and regulations (Lessig 1999). A significant naive belief persists that standards development activities (SDA) have minimal public policy impact. This belief is based on the incorrect premise that standards are nothing more than mere technicalities reflecting physical constraints

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inevitably and mechanically produced from empirical findings that define the domains of natural sciences and engineering. Increasingly, however, standardization is understood to have substantial impact on functional and economic success. Many standards are produced by coordinated collective activity that represents collaborative processes infused with technical design but carried out largely by self-selected groups whose foresight is intended to serve their own self-interests. Successful participation in SDA usually requires considerable resource investments because SDA can be protracted and a frustrating political processes. Useful contributions by most modern SDA participants depend on their technical analytical acumen as well as their strategic savvy. The standards developed in modern SDA often confer economic benefits on many direct participants but can also burden others, particularly those not directly engaged in the SDA. Traditional de jure standardization by government agencies have been presumed to make objective and optimal selections from existing technologies. Such traditional standards-setting processes are increasingly displaced by SDA because nontrivial design components infuse modern technical standards. For example, SDA generally involves at least some highly-active participants who assume aggressively identifiable profiles (avatars) because they propose particular solutions largely crafted outside the SDA (Umapathy, et, al. 2010). Other, less active participants are typically engaged in proposing modifications, accepting, adopting, and standardizing this proposed solution as a new design. Standards with a substantial design component are known as anticipatory standards because they anticipate markets for compliant products (Cargill 1989). Compare this development of voluntary consensus standards with the innovation leading to de facto standards. De facto standards are also infused with design but are developed by one or more independent private contributors, often in


secretive venues so that proprietary designs remain protected under IP law. SDO standardization venues are increasingly regulated by both contextual and normative constraints. The U.S. standardization umbrella organization, ANSI, is a private body standardizing SDA. ANSI specifies that due process requirements must be followed by VCSB for the standards produced, before they can be designated as American National Standards (ANSI 2008). ANSI’s due process requirements are actually democratic principles similar to those followed in many democratic nations for legislation and regulatory rulemaking. Another influence on SDA to require compliance with democratic principles comes from the U.S. Office of Management and Budget’s OMB Circular A-119. Federal regulatory agencies in the U.S. are encouraged to participate and adopt standards developed in SDA so long as they are compliant with OMB A-119, which are similar to ANSI’s due process requirements (OMB A-119 1998). The U.S. exerts additional incentives on SDOs to follow democratic principles under the Standards Development Organization Advancement Act of 2004 (SDOAA). The SDOAA provides a partial antitrust exemption for SDAs compliant with the SDOAA (SDOAA 2004). Two aspects of modern standardization raise the risk of antitrust scrutiny: (1) the traditional suspicion that collaborative activity is collusive and (2) the increasing inclusion of IP rights in many standards. Such antitrust scrutiny is of particular concern to traditional consortia, particularly those outside the U.S., unless they impose similar due process requirements to achieve democratic principles and regulate IP in resulting standards. The SDOAA’s limited antitrust immunity is premised on a Congressional finding that SDA are beneficial for society as well as for government. When SDO’s have democratic principles discussed above, a more lenient, rule of reason approach applies to the collaboration, rather than the stringent, per se rule. Furthermore, treble damages are not permitted and SDO bodies are encouraged to disclose

their SDA for review by antitrust regulators: DoJ and FTC. The collaboration in SDA runs the risk of liability for collusive antitrust offenses such as price-fixing, tying, concerted refusals to deal, and the creation of barriers to entry by competitors or alternate technologies (Allied Tube 1988). While these antitrust offenses are typically considered automatically unlawful under the per se rule, compliance with SDOAA democratic principles permits application of the more lenient rule of reason. The per se rule developed as courts encountered repetitive collusive activities that were never justified, making them automatically unlawful. Per se analysis is considered efficient because it shortens trials and provides clear guidance but can be unfair when applied to SDA. The SDO must file a notice with antitrust regulators to receive this partial immunity. The rule of reason requires an ad hoc analysis that can consume considerable judicial and regulatory resources so may be simultaneously both less efficient and more fair to the collaborators. The SDOAA does not immunize SDO bodies from international antitrust enforcement, state antitrust enforcement or private antitrust liability suits. Democratic principles for SDA are based on OMB A-119 and ANSI’s due process requirements which compel “equity and fair play” in “activities related to the development of consensus for approval, revision, reaffirmation, and withdrawal of American National Standards.” SDO must permit participation by almost any party, the SDA must consider each participant’s contention and provide for them to appeal adverse decisions. There are eight ANSI “essential due process requirements” as well as normative policies on intellectual property, commercial terms and conditions, and recordkeeping. These constitute standards for the conduct of SDA . American National Standards: Due Process Requirements ◦âŠ¦ Openness ◦âŠ¦ Lack of dominance

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◦âŠ¦ ◦âŠ¦ ◦âŠ¦ ◦âŠ¦ ◦âŠ¦ ◦âŠ¦

Balance Notification Consideration Consensus Appeals Written procedures

Participation opportunities for consumers and any person with a direct financial interest in the proceeding is required by the openness due process requirement. No undue financial barriers are permitted. Voting eligibility requirements cannot be unreasonably based on organizational affiliation or technical qualifications. The lack of dominance standard requires a fair and equitable consideration of viewpoints by prohibiting domination by any single interest, category, individual, or organization. Dominance can arise from a position or exercise of dominant authority, leadership, or influence by reason of superior leverage, strength, or representation, including voting blocs. The balance standard also requires participants from a range of diverse interest categories and may depend on the impact that a developing standard might have on the group’s interests. Quantitative thresholds of imbalance (proportional representation) are no longer required, but, a minimum, participation should include producers, users, and the general public. Sometimes other constituencies are appropriate: consumers, directly affected public, distributors and retailers, industrial and/ or commercial interests, insurance industry, labor, manufacturers, professional societies, regulatory agencies, testing laboratories, and trade associations. Notice is required that clearly describes the SDA purpose, identify details about participants, and make available attendance relevant information. Notice is also required when particular participants’ views are accommodated or are not accommodated. Prompt consideration must be given to all participants’ views and objections. The democratic process envisioned is one of consensus, usually manifest through voting. Voter eligibility, election procedures, and recordkeeping

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rules are permissible. All members must be eligible to vote, and may change their votes. Comments accompanying votes are recorded. Written or absentee balloting (e.g., electronic proxy) must be accommodated. The final results of voting must be reported. These complex voting procedures imply recursive negotiations. The SDO body must provide for appeals from complaints that protect participants’ direct and materially affected interests. Appeal procedures should be fair for the impartial handling of procedural complaints and the appeals tribunal remains unbiased and conducted promptly. All SDO bodies make their procedures available in writing. In the U.S., federal regulatory agencies must use technical standards developed or adopted by VCS bodies whenever possible. The National Technology Transfer and Advancement Act (NTTAA) of 1996 requires most agencies to consult and participate with VCS bodies if it is in the public interest and compatible with the agency’s missions, authorities, priorities, and budget resources (NTTAA 1996). Such VCS standards help to reduce government costs for the development of de jure standards, control procurement costs, and help to harmonize standards that promote societal efficiency and rigorous competition. OMB Circular A-119 has a due process requirements approach that parallels the ANSI’s due process requirements. All forms of intellectual property (IP) are important to standardization. Patent rights are most important, they are controversial and discussed below. However, the three other IP rights can also be important: copyright, trade secrets and trademarks. First, copyright is involved because standards are nearly always recorded in documents generally protected by national copyright laws and international copyright treaties because standards are expression affixed in a tangible medium. Copyright is typically held by the SDO body because this enables a business model that funds the SDO body through the sale of printed or electronic copies of the standards. Selling standards still appears to be the fundamental value


proposition in the business model of not-for-profit SDO bodies (Veeck 2003). The U.S. is nearly unique among all nations in that when standards are incorporated into law, the text cannot be hidden from the public by this copyright protected business model. Second, trade secrets can be important to standards, such as data incorporated into particular standards or underlying patentable ideas embodied in standards. Trade secrets are difficult to maintain after the standard is published and reported out. Trade secrets may eventually form the basis for a patent (In re Unocal 2005). Separately, data can be maintained as a trade secret by the SDO to support the fundamental value proposition in the SDO’s business model of selling standards. Indeed, several SDO’s deploy digital rights management (DRM) techniques that raise user irritation to a level that users are diverted to purchase printed or electronic copies of the desired standards. Finally, there are occasionally trademark aspects of standards. For example, an SDO body can build goodwill as the primary venue for a particular type of standard by branding. The SDO body’s trademarks or service marks contribute to branding and the eventual maintenance of goodwill that also reinforces the SDO’s business model. The most significant IP problem plaguing SDA in recent years has largely been patents. Patents are potentially valuable components of standards as exemplified in the Unocal and other cases. Patentable subject matter relevant to standards can include novel and non-obvious machines, (articles of) manufacture, compositions of matter and processes. Many successful products contain patented technologies. Consider the ubiquitous examples of vehicles, computers, and communications networks as physical products that link patents, standards, and physical component products. However, considerable attention surrounds methods and system designs that prescribe operations or functions carried out by compliant physical objects. Process patents were once disfavored, English law required pat-

ents to extend only to physical embodiments, by requiring a “vendable substance” (Bagby 2000). Process patents lie at the heart of business methods, software, biotechnology (e.g., genetic identification, medical diagnosis and treatment), interface design and many technical standards. There is risk, however, in reliance on business method and software process patents because their validity remains uncertain (Bilski 2008). There are tradeoffs inherent when SDA participants hold patent rights to technologies embodied in the standards they help develop. SDO rules can be inadequate to require that participants make ex ante disclosure of the patent rights they hold before that IP becomes embodied in the resulting standard. As the Unocal case discussed above illustrates, when SDO bodies do not constrain disclosure and use of IP rights, this triggers significant problems of patent holdup, a form of patent ambush, from submarine patents that enable the exercise of monopoly power by patent holding SDA participants (Lemley 2002).

FUTURE RESEARCH DIRECTIONS Much of the existing research in standardization concerns the fairness of the standardization process, the forthrightness of standardization participants, the political nature of standardization, strategic participation models, competition among SDO bodies, and standards wars. Outside the context of de jure emissions control standardization, there are largely unexplored areas of environmental standardization ripe for research. The largest body of scholarly attention has examined standardization in traditional network industries with the primary concentration in the standards of information and communications technologies. This chapter’s treatment of environmental standardization for sustainability suggests several areas for immediate research that might assist in re-designing SDA process for efficiency and applying such findings specifically to environmental standardization for sustainability. First, the quality

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of due process actually experienced in various standardization venues for all three major tiers of environmental standardization should be examined from several research perspectives: political economy, doctrinal legal research, sociology, cognitive psychology, industrial organization and public policy. For example, the role of affected parties beyond NIST’s intended user group, such as downstream users, society and the environment, have been largely ignored when directed to voluntary consensus standards organizations and consortia. Environmental standardization may be the ideal domain to better develop understanding about participation by more remote affected parties because this is an inherently strong focus in environmental concerns. There are technical barriers to effective political checks and balances given the proliferation of SDO venues and the constrained supply of public interest participants with sufficient technical expertise to effectively analyze externalities of proposed standards. Second, this chapter argues that environmental standardization is much broader than de jure governmental emissions standards. Research into the overall system of environmental standardization could reveal the benefits and costs of each tier of standardization with a view to optimizing the whole system’s costs and benefits. For example, efforts to standardize the electric grid under auspices of the Smart Grid largely focus on coordinating generation capacity, hardening the electric grid’s security, and coordinating transmission facilities with user demand (consumer and industrial) to avoid system failure and damage (NIST 2009). However, a systems analysis perspective of the Smart Grid would look beyond these national security and energy efficiency foci, to externalities such as how the individual human information collected through the Smart Grid as a cyber-infrastructure triggers considerable privacy concerns that Smart Grid standards have already overlooked (Lynch 2008). The due process and political accountability aspects of voluntary consensus standards bodies have not been adequately examined in the litera-

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ture of any discipline; the absence in the political economy literature may be most significant. This research should examine the similarities among the ANSI and OMB A-119 schema then juxtapose these with participation rules at other major international SDO venues such as the ISO. These fairness standards represent an important evolution towards universal political accountability and due process of standardization processes. While precise uniformity among all these schema seems both unnecessary and unlikely, it can be expected that international SDO bodies and accrediting bodies will not directly adopt all the characteristics of the ANSI rules. Indeed, other nations are unlikely to adopt the precise wording of almost any U.S. law or policy without considerable adjustments reflecting their national cultures and uniqueness. This poses increasing problems for environmental standardization because these SDO bodies direct their standards to all nations. Economies of scale and network externalities are weaker without cross-border standardization and international environmental treaties urge international standardization. Of course, it is arguable that the similarities tend to overpower the differences, fostering commerce and general conformity. Perhaps, an equilibrium in standardization process design is under way. Nevertheless, research is needed reconciling ANSI due process requirements with OMB due process attributes and the SDOAA. It is uncertain how the competition among SDO bodies will be determined because they have “race to the bottom” incentives to attract SDA participants. To the extent that major contributors still seek to game the IP disclosure system at selected SDO bodies with weak due process and IP disclosure rules, research into the competition among SDO bodies would be a useful public policy tool to standardize SDO bodies’ rules of participation. To avoid patent hold-up problems SDO bodies should toughen their IP disclosure rules and mandate requirements for fair access to the patented portion of a standard. Future research


suggested here promises to make environmental standardization for sustainability more certain, attracting venture capital and other financing of the key research needed to develop technologies and processes and compliant product production capacity essential to the improvement of environmental quality.

CONCLUSION There is very significant experience with the public policy conflict over de jure governmental standards controlling environmental emissions. No similar understanding exists about the large range of other environmental standardization activities. If political pressures continue or increase to control environmental quality, these de jure standards can be expected to remain as the predominant driver for most business models to attain sustainability. However, standards are much more pervasive over a wide range of environmental matters as demonstrated in this chapter. Any traditional focus on de jure governmental emissions limitations will ignore large areas of business opportunity for green business models where standardization controls product design, use and conformity assessment. The areas of anticipatory standards defining technologies embodied in a wide range of products provide opportunities for SDA participation that would signal impending lucrative business models. Similarly, participation in standardization addressing conformity assessment provides numerous unique opportunities. Success in financing and deploying business models requires a strategic understanding of standardization and may suggest more active participation in a wide range of SDA directly impacting environmentalism. Standards and their underlying development processes are emerging from obscurity because they impact economic activity, are decreasingly viewed as technically objective matters, are increasingly viewed as arbitrary design choices from among many promising alternatives, and are strategic

choices that may favor or disfavor international regions, particular nations, industries, firms, and other identifiable groups.

REFERENCES Accounting for Contingencies. (1975). Statement of financial accounting standards no.5: Asset retirement and environmental obligationsenvironmental obligations. (Accounting Standards Codification (ASC) Topic 410, Subtopic 30). Retrieved from http://www.fasb.org/pdf/fas5.pdf Administrative Procedure Act (APA). 1946. 5 U.S.C. §§500–504, 551–559, 561–570a, 571–584, 591–596, 701–706 (1946). Albert, L. S., & Burke, A. J. (Eds.). (2004). Handbook on the antitrust aspects of standards setting. Chicago, IL: American Bar Association. Allied Tube & Conduit Corp. v. Indian Head, Inc. (1988). U.S. Supreme Court, 486(492). American National Standards Institute. (2008). ANSI essential requirements: Due process requirements for American National Standards. Retrieved from www.itl.nist.gov/ANSIASD/2008ANSIEss entialRequirements31108.pdf Bagby, J. W. (2000). Business method patent proliferation: Convergence of transactional analytics and technical scientifics. Business Lawyer, 56(November), 423–458. Bagby, J. W. (2010). Role of standardization in technology development, transfer, diffusion and management, vol.3. In H. Bidgoli (Ed.), Ch.49, The handbook of technology management. Hoboken, NJ: John Wiley & Sons. Bagby, J. W., Murray, P. C., & Andrews, E. T. (1995). How green was my balance sheet: Corporate liability and environmental disclosure. Virginia Environmental Law Journal, 14(2), 225–342.

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Cargill, C. F. (1989). Information Technology standardization: Theory, process, and organizations. Newton, MA: Digital Press. Circular, O. M. B. A-119. (1998). Federal Register, 63(33), 8. Retrieved from http://www.whitehouse. gov/omb/rewrite/circulars/a119/a119.html Farrell, J., & Saloner, G. (1985). Standardization, compatibility, and innovation. The Rand Journal of Economics, 16(1), 70–83. doi:10.2307/2555589 Fomin, V., Keil, T., & Lyytinen, K. (2003). Theorizing about standardization: Integrating fragments of process theory in light of telecommunication standardization wars. Systems and Organizations, 3(Winter). Case Western Reserve University. Retrieved from http://sprouts.aisnet.org/3-10 Gandal, N., & Shy, O. (2001). Standardization policy and international trade. Journal of International Economics, 53(April). ISO/IEC 27001:2005. (2005). Information technology–security techniques–information security management systems–requirements. International Organization for Standardization. Jane’s Information Group. (2003). Jane’s world railways, 45th ed., 2003–2004. Coulsden, Surrey, U.K.: Jane’s Information Group Limited. Katz, M. L., & Shapiro, C. (1985). Network externalities, competition, and compatibility. The American Economic Review, 75(3), 424–440. Kobayashi, B. H., & Wright, J. D. (2009). Intellectual property and standard setting. (George Mason Law & Economics Research Paper No. 09-40). In ABA handbook on the antirust aspects of standards setting. Chicago, IL: American Bar Association. Retrieved from http://ssrn.com/abstract=1460997 Lemley, M. A. (2002). Intellectual property rights and standard-setting organizations. California Law Review, 90, 1889–1980. Retrieved from http://ssrn. com/abstract=310122. doi:10.2307/3481437

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Lessig, L. (1999). Code and other laws of cyberspace. Jackson, TN: Basic Books. Lynch, J. (2008). Joint comments of the Center For Democracy & Technology and The Electronic Frontier Foundation on proposed policies and findings pertaining to the smart Grid. (California Public Utilities Commission Rulemaking No. 0812-009). Retrieved from http://www.eff.org/files/ CDTEFFJointComment030910.pdf Mitra, P., Purao, S., Bagby, J. W., Umapathy, K., & Paul, S. (2005). An empirical analysis of development processes for anticipatory standards. (NET Institute No. 05-18, October 2005). Retrieved from http://www.netinst.org/Mitra.pdf National Academy of Sciences (NAS). (1995). Standards, conformity assessment, and trade: Into the 21st century. International Standards, Conformity Assessment, and U.S. Trade Policy Project Committee, Board on Science, Technology, and Economic Policy, National Research Council (National Academies Press). Retrieved from www. nap.edu/openbook.php?isbn=030905236X National Technology Transfer and Advancement Act of 1996 (NTTAA). (1996). (Pub. Law 104113, 110 Stat. 775). Retrieved from http://ts.nist. gov/standards/information/113.cfm NIST. (2009). Cyber security coordination task group. Smart Grid cyber security strategy and requirements. (NISTIR 7628). Retrieved from http:// csrc.nist.gov/publications/drafts/nistir-7628/ draft-nistir-7628.pdf Oshinsky, J., Masters, L. S., Feder, S. L., & Briggs, C. (2010). Cell phone litigation advisory: Calling for coverage. Mealey’s Litigation Report. Insurance, 24(11), 1–3. Rysman, M., & Simcoe, T. (2005). Patent performance of voluntary standard setting organizations. Retrieved from http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=851245


Smith, D. A. (1987). Mining America: The industry and the environment, 1800-1980. Lawrence, KS: University of Kansas Press. Standards Development Organization Advancement Act of 2004 (SDOAA). (2004). (Pub. Law No. 108-237, 118 Stat. 661, H.R. 1086). Retrieved from http://frwebgate.access.gpo.gov/ cgi-bin/getdoc.cgi?dbname=108_cong_public_laws&docid=f:publ237.108.pdf Swope, C. (2007, May). The green giant: How a single nonprofit—the U.S. Green Building Council—defines sustainability for the nation. Architect Magazine. Retrieved from http://www. architectmagazine.com/green-standards/thegreen-giant.aspx Umapathy, K., Paul, S., Purao, S., Bagby, J. W., & Mitra, P. (2010). Avatars of participants in anticipatory standardization processes. In Bolin, S. (Ed.), Standards edge: Unifiers or divider. Menlo Park, CA: The Bolin Group. Union Oil Company of California. (2005). FTC Docket No. 9305. Retrieved from http://www.ftc. gov/os/adjpro/d9305/040706commissionopinion. pdf U.S. Department of Justice & Federal Trade Commission. (1995). Antitrust guidelines for the licensing of intellectual property. Retrieved from http://www.ftc.gov/bc/0558.pdf Veeck v. Southern Building Code Congress, Int’l, Inc., 393 F.3d 791 (2002). cert.denied 539 U.S. 969 (2003). Weiss, M., & Cargill, C. (1999). Consortia in the standards development process. Journal of the American Society for Information Science American Society for Information Science, 43(8), 559–565. doi:10.1002/(SICI)10974571(199209)43:83.0.CO;2-P

ADDITIONAL READING Allen, R. H., & Sriram, R. D. (2000). The Role of Standards in Innovation. Technological Forecasting and Social Change, 64, 171–181. doi:10.1016/ S0040-1625(99)00104-3 Carlton, Dennis W., and J. Mark Klamer. (1983). The Need for Coordination Among Firms, with Special Reference to Network Industries. The University of Chicago Law Review. University of Chicago. Law School, (50): 446. doi:10.2307/1599497 Central Secretariat, I. S. O. (2009) Environmental Management the ISO 14000 family of International Standards. ISO Report, Geneva. Hesser, W. (2006). Standardization in Companies and Markets. Hamburg: Helmut Schmidt University. Japan Fair Trade Commission. (1999). Guidelines For Patent And Know-How Licensing Agreements Under The Antimonopoly Act, accessible athttp://www.jftc.go.jp/e-page/legislation/ama/ patentandknow-how.pdf Katz, M. L., & Shapiro, C. (1985). Network Externalities, Competition, and Compatibility. The American Economic Review, 75(3), 424–440. Lyytinen, K., Keil, T., & Fromin, V. V. (2008). A Framework to Build Process Theories of Anticipatory Information and Communication Standardizing. International Journal of IT Standards and Standardization Research, 6(2), 1–38. doi:10.4018/jitsr.2008010101 Melo, C. J., & Wolf, S. A. (2005). Empirical Assessment Certification. Organization & Environment, 18(3), 287–317. doi:10.1177/1086026605279461 Patterson, M. R. (2002). Inventions, Industry Standards, and Intellectual Property. Berkeley Technology Law Journal, 17, 1043.

Woodruff v. N. Bloomfield Gravel Mining Co., 18. F. 753 (C.C.D. Cal. 1884) (Lorenzo Sawyer, U.S. Circuit Judge titled: “The Mining Debris Case”).

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Puller, S. L. (2006). The Strategic Use of Innovation to Influence Regulatory Standards. Journal of Environmental Economics and Management, 52, 690–706. doi:10.1016/j.jeem.2006.07.002 Report, W. T. (2005). Exploring the links between trade, standards and the WTO -Standards, offshoring‘ and air transport, World Trade Organization (WTO) Geneva accessible athttp:// www.wto.org/english/res_e/booksp_e/anrep_e/ world_trade_report05_e.pdf Shapiro, C. (2000). Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting, in Innovation Policy And The Economy (Adam B. Jaffe et al. eds.)1 p. 119. Shapiro, C., & Varian, H. R. (1999). Information Rules. Boston, MA: Harvard Business School Press. Shapiro, C., & Varian, H. R. (1999). The Art of Standards Wars. California Management Review, 41(2), 8–32. Swann, G. M. P. 2000, The Economics of Standardization, in Report for Department of Trade and Industry, Standards and Technical Regulations Directorate, p.90, accessible athttp://www.dti.gov. uk/strd/fundingo.htm#swannrep Updegrove, A. 2007. What (and why) is a consortium? Boston, MA: ConsortiumInfo.Org, Gesmer Updegrove LLP accessible athttp://consortiuminfo.org/what/. U.S. Dep’t of Justice & Fed. Trade Comm’n, (2000) Antitrust Guidelines for Collaborations Among Competitors accessible athttp://www.ftc. gov/os/2000/04/ftcdojguidelines.pdf U.S. Dep’t of Justice & Fed. Trade Comm’n, (2007) Antitrust Enforcement And Intellectual Property Rights: Promoting Innovation and Competition, accessible athttp://www.justice.gov/atr/ public/hearings/ip/222655.pdf

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Williamson, O. E. (1985). The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. New York: Free Press.

KEY TERMS AND DEFINITIONS ANSI Due Process Requirements: Process requirements for standardization activities that prescribe normative goals that control self-interest of the private parties engaged in standards development activities. Anticipatory Standards: Standards that are developed ex ante to markets that supply products and services compliant with the standard. Antitrust: The U.S. term for anti-monopoly or competition law applicable regulate markets where dominant participants possess market power or coordinated collaboration results in unlawful collusion. Conformity Assessment: Activity intimately involved in standardization that determines conformity with standards for processes, products, or services, examples include, e.g., testing, observation, inspection, audit, certification, registration, accreditation. Consortium: Standards development organization in the private sector, characterized by a quick and temporary convened venue intending to develop a single standard or narrow family of related standards. Coordination Problem: Challenge under game theoretic analysis in which market participants could conceivably make decisions that achieve mutual gain but is constrained by disincentives to reveal proprietary information or be subject to litigation risks of collusion. De Facto Standards: Informally set standards where proprietary designs emerge as successful under competitive conditions. De jure Standards: Formally set standards typically in government venues or at other authorized organizations.


Due Process: A portfolio of enforceable rights in legislative, regulatory, and adjudicatory venues intended to achieve fundamental fairness, justice, and liberty for individuals and corporations of democratic processes. Ex Ante: Activity or analysis taken before an action is effected or its effects are measureable. Excessive variety: extensive heterogeneity in goods or services beyond some theoretical maximum necessary to reasonably satisfy demand. Network Effects/Network Externality: Impact of economies of scale in markets connecting nodes by links in which all participants experience an increase in value for the goods or services of that network as the number of participants increases. Standardization: A process in which technical specifications are set, created or developed such that a sufficient commonality in design elements enables compatible or compliant products or processes. Standards Development Activities (SDA) or Standards Setting Activities (SSA): Activities in which contributions, meetings, and other

interactions comprise the selection or design of standards, usually conducted in a standards development organization SDA). Standards Development Organization (SDO, SDO body) or Standards-Setting Organization (SSO): A venue or organization that hosts the development or setting of standards. Switching Costs: Characteristic of lock-in that barriers to change; a hypothetical cost erecting a barrier to exit that an individual or organization would face in shifting suppliers, processes, systems, or equipment. Switching costs are composed of breach of contract damages, acquisition costs for new equipment, costs of abandoning unused service life in existing equipment or software, costs of retraining, and opportunity cost risks of unsuccessful transitions. Voluntary Consensus Standards (VCSs): Type of standard developed in standards development organizations (SDO) typically in privatesector venues or consortia but not conducted through government regulatory agencies.

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Chapter 3

Promoting Technological Environmental Innovations: What is the Role of Environmental Regulation? Jacqueline C. K. Lam The University of Hong Kong, Hong Kong Peter Hills The University of Hong Kong, Hong Kong

ABSTRACT This chapter reviews and discusses the debate over the effectiveness of environmental regulation in promoting industrial Technological Environmental Innovation (TEI). Using the innovation-friendly regulatory principles adapted from Porter and van der Linde (1995a and 1995b), this chapter demonstrates how properly designed and implemented environmental regulation (TEI promoting regulation) has played a critical role in promoting TEI in the transport industry in California and Hong Kong. In both cases, it has been shown that stringent environmental regulations that send clear and strong signals for future environmental performance requirements are critical in promoting TEIs in the public transport industries. Unlike traditional command-and-control regulations, TEI promoting regulations are strongly supported by incentive and capability-enhancing measures.

INTRODUCTION Technological Environmental Innovation (TEI) has been seen as a critical means to achieve DOI: 10.4018/978-1-60960-531-5.ch003

both economic gains and improved environmental performance in the greening of industry literature (Porter and van der Linde, 1995a and 1995b; Gouldson and Murphy, 1998; Murphy and Gouldson, 2000; Mol and Sonnenfeld, 2000;


Promoting Technological Environmental Innovations

Mol, 2003). TEI offers not only the potential to reduce emissions and resource consumption but also the opportunity to improve eco-efficiency and economic competitiveness (Porter and van der Linde, 1995a and 1995b; Gouldson and Murphy, 1998; Mol, 1995; Mol and Spaaragaren, 2000). Industries can achieve long-term economic sustainability through continuous greening of their production and operational processes. Economists have argued that economic, institutional and attitudinal barriers may hinder the adoption of TEIs and that relevant environmental policy instruments are needed to overcome the barriers (Klemmer, Lehr and Lobbe, 1999; Jaffe, Newell and Stavins, 2005). This paper reviews and discusses the debate over the effectiveness of environmental regulation in promoting industrial TEI. With reference to the innovation-friendly regulatory principles modified from Porter and van der Linde (1995a and 1995b), this paper argues that properly designed and implemented environmental regulations have played a critical role in promoting TEI in the transport industry in California and Hong Kong.

TECHNOLOGICAL ENVIRONMENTAL INNOVATION AND REGULATIONS It has been argued that traditional environmental regulation as characterized by environmental standards or permits offers little incentive for TEI because of its inflexible, technology-forcing, bureaucratic and adversarial characteristics (Fiorino, 2006: 73-75). There are repeated claims that environmental regulations, typically those employed in the US, are based on existing technology and do not provide additional incentives to innovate once the regulatory requirements have been met (Porter and van der Linde, 1995a and 1995b; Jaffe and Stavins, 1995; Norberg-Bohm, 1999; Fiorino, 2006). Environmental regulations are often not effective in promoting TEI diffusion because regulatory standards are usually more lax

than standard practice and therefore provide little incentive for diffusion (Jaffe and Stavins, 1995; Fiorino, 2006). Environmental regulations that are based on performance standards are usually technology-setting, which could hamper radical innovation because firms do not like taking risks (Norberg-Bohm, 1999). In some cases, the incentive to innovate and diffuse environmental technologies is further constrained by bureaucracy long embedded in the regulatory system (Fiorino, 2006). Finally, the relationship between regulators and regulated industries are sometimes highly adversarial (Fiorino, 2006). High uncertainty and the lack of trust have left industries with little incentive to move forward. Despite these claims about the inefficiency of environmental regulation in promoting TEIs, Porter and van der Linde argue that “the problem with (environmental) regulation is … the way in which standards are written and the sheer inefficiency with which regulations are administered” (1995a:46). They contend that environmental regulations that are properly designed and implemented and aim at innovation can provide strong pressure and incentives, and result in higher resource productivity and efficiency and more competitive advantages. Consequently, industries can actually be incentivized to innovate continuously. Nevertheless, innovation-friendly environmental regulation differs from traditional complianceoriented forms in a number of ways, namely, goal-setting, outcome-oriented, stringency, flexibility, certainty, consistency, incentive-based, voluntary-based, information-coupling, participatory, process-based and capability-enhancing (Ashford, 2000 and 2002; Porter and van der Linde, 1995a and 1995b). Among all the regulatory characteristics, Norberg-Bohm (1999) argues that environmental regulations that provide stronger political or economic incentives (incentive-based), and clearer signals about future environmental performance requirements (certainty), are critical for driving TEIs where pay-offs are more long-

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term or uncertain (radical TEIs). Other regulatory characteristics such as information about the magnitude and cost of pollution control, flexibility in choosing which technology can be used to meet the regulatory targets, and the demonstration of key short-term economic benefits are also important in spearheading incremental TEIs. In addition, empirical studies on industrial environmental innovation in the United Kingdom (Gouldson and Murphy, 1998), European countries (Klemmer, Lehr and Lobbe, 1999; Hitchens et al., 2000) and the United States (Porter and van der Linde, 1995a and 1995b; Ashford, 2000, 2002; Fiorino, 2006) have consistently highlighted that regulatory pressure is a key factor in motivating industries to adopt new environmental technologies and initiatives. Some may consider economic instruments a better alternative to direct environmental regulation. However, economic instruments alone, such as tax exemptions, may actually “result in fewer incentives to innovate than direct environmental regulation. The tax rate is often set at a low level in order not to impose excessively high costs on the industry” (Mickwitz, Hyvattinen and Kivimaa, 2008: 168). If an economic instrument does not impose a cost on alternative solutions, it can do little to promote environmental innovation (Mickwitz, Hyvattinen and Kivimaa, 2008). On the other hand, direct environmental regulations that are properly designed, for instance, environmental regulations with high stringency and high anticipation for standard tightening, have been effective in stimulating companies to pursue TEIs to gain competitive advantage (Mickwitz, Hyvattinen and Kivimaa, 2008). The significance of properly designed environmental regulation in steering environmental innovation was illustrated in a review study which examined the effects of policy instruments on environmental innovation (Ekins and Venn, 2006). Among the five case studies of policy effects on steering energy efficiency-related environmental

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innovations, four of them based in USA, Japan and Germany were strongly driven by direct environmental regulations and achieved excellent results. Policy instruments included stringent environmental regulations, increasing regulatory standards and mandatory public procurements. In these four cases, strong environmental regulations emerged as either standalone policy instruments or policy instruments coupled with market-based economic instruments (Ekins and Venn, 2006). The theoretical and empirical studies cited above have demonstrated that environmental regulation is effective in exerting pressure on and steering the industry to adopt TEI and cannot simply be ignored or replaced by other policy instruments. The focus of the study is not whether environmental regulation is needed or not. The crucial question is: How can regulations be designed and implemented in a way that promotes TEIs? However, few studies have provided a systemic account of what design and implementation characteristics have led to successful innovation and diffusion of environmental technologies. To bridge the gap, this paper will assess how well the set of regulation characteristics described in Porter and van der Linde (1995a and 1995b) and Ashford (2000) have facilitated the promotion of TEI. In the following section, 12 regulatory characteristics will be provided based on Porter and van der Linde (1995a and 1995b) and Ashford (2000). They will be used to evaluate two successful cases of transport environmental technology regulation presented later in the paper.

CHARACTERISTICS OF TEI PROMOTING REGULATIONS Porter and van der Linde (1995a, 1995b) argued that a properly designed innovation-oriented environmental regulation should possess the following characteristics.


Table 1. Characteristics of Innovation-oriented Regulations Regulatory Characteristics

Regulatory Details and Impacts on Technological Environmental Innovation

Goal-setting

Environmental regulation should focus on long-term, broad, systemic goals, so as to steer regulated firms to seek the most innovative solutions, instead of mandating particular environmental technologies or technology standards.

Outcome-oriented

Environmental regulation should focus on outcomes, not on technologies. Technology-setting approach fails to encourage continuous innovation once the “best” available technology is identified.

Stringency

Environmental regulation should provide an impetus for regulated firms to strive for superior environmental performance.

Flexibility

Environmental regulation should increase flexibility to allow firms to freely decide on their own ways of meeting the regulatory targets.

Certainty

Environmental regulation should reduce the uncertainty of the environmental targets that the regulated firms are to accomplish, and the uncertainty of the time-table for regulation. Phase-in periods, early announcement and well-defined environmental targets are common ways to achieve certainty. Regulatory certainty helps the estimation of negative consequences of non-compliance, and results in greater motivation to plan ahead and commit to better environmental performance.

Consistency

An environmental regulation should be consistent with other related regulations as marked by a clear regulatory process and clear environmental standards. Regulatory consistency should be reached in at least three ways: between industries and regulators, between regulators at different levels and places in government, and between regulators and their international counterparts.

Incentive-based

Environmental regulation should include the use of market incentives, including pollution taxes, deposit-funded schemes and tradeable permits. It allows flexibility, reinforces resource productivity, and creates incentives for ongoing innovation. Incentives for innovation can also be built into the regulatory process by waiving permits or promising an immediate permit if a company takes a zero-discharge approach.

Voluntary-based

Regulatory authorities should promote the increased use of preemptive standards. Industries are allowed to set their own standards to avoid government standards that might be stricter. Such voluntary standards can go with regulatory oversight to avoid collusion. They are not only less costly but allow faster change and leave the initiative for innovation to industry.

Information- coupling

Regulating authorities should collect and disseminate information on innovation offsets and their consequences. The information can be used to facilitate the measurement of the full internal costs of pollution and ways of exchanging best practices and learning about innovative technologies and to understand the opportunities for innovation.

Participatory

Environmental regulation should encourage industrial participation in the design of phase-in periods, the content of regulations and the regulatory process. Stakeholder participation can facilitate trust-building and self-regulatory behaviours. It promotes smoother cooperation among different parties.

Process-based

Environmental regulation should allow continuous update of the regulatory requirements so that the regulation is responsive to and reflective of the feedback from stakeholders about market maturity or commercial availability of particular technology options

Capability-enhancing*

Sound technological and non-technological capabilities are pre-requisites for firms to innovate. Environmental regulation should enhance the competence of both the regulators and industries, by better information exchange, technical assistance, demonstration projects, education/training programmes and consulting services.

Source: Porter and van der Linde (1995a, 1995b); *adapted from Ashford (2000)

CASE STUDIES The 12 characteristics above are used to evaluate two sets of environmental regulations that have

promoted the development and adoption of environmental transport technologies in California and in Hong Kong.

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Promoting the Demonstration and Acquisition of ZeroEmission Buses in California: The Role of ZEBus Regulation Regulatory Details The first case study examines the demonstration and acquisition of Zero-Emission Buses (ZEBuses) in California and the role of Zero Emission Bus Regulation (ZEBus Regulation) introduced by the California Air Resources Board (CARB). The ZEBus Regulation was first introduced in 2000 by the CARB under the Transit Fleet Rule (California Code of Regulations (CCR) title 13, sections 2023 et seq.). The ZEBus Regulation was introduced with the intention of reducing emissions from transportation and improve air quality in California by “establishing a new fleet retrofit and modernization rule for transit agencies and more stringent emission standards of new urban bus engines and vehicles” (CARB, 2010a, p. 2). The ZEBus Regulation contains three primary elements. 1. Demonstration: Diesel path transit agencies are required to initiate a ZEBus demonstration. 2. Acquisition: 15 percent of new annual bus purchases are required to be ZEBuses. 3. Size-dependent: Only large transit agencies whose fleet size exceeds 200 buses are affected. Under the fleet rule, each transit agency was required to select a compliance path – either the “diesel” path or the “alternative fuel” path. Large transit agencies of fleet size over 200 urban buses are required to acquire 15 per cent of all new annual urban bus purchases as ZEBuses. The regulation also included requirements for transit agencies to demonstrate ZEBus with the goal of developing zero-emission transit rules (CARB,

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2010a). In California, 10 transit agencies have a fleet size of more than 200 buses. They range from the Golden Gate Transit with 209 buses to the LA Metro with almost 2,700 buses. Under the current ZEBus Regulation, 6,800 urban buses which represent about half of the statewide population will be subject to the requirements of the ZEBus Regulation (CARB, 2010a). Several amendments were made to the ZEBus Regulation in 2004 and 2006. The most recent modifications approved in 2006 included a delay in the ZEBus purchase requirement to 2011 for diesel path agencies, and 2012 for alternative path agencies. The CARB also added an “advanced” demonstration for large transit agencies to the diesel path. In 2009, based on the information presented and public testimony received, the CARB kickstarted the procedures to amend the ZEBus Regulation. The amendments include delaying the purchase requirement of ZEBuses, researching and developing commercial-readiness metrics as a purchase-implementation criteria, and implementing the ZEBus purchase requirement once commercial readiness has been achieved with lead-time and ramp-up period for reaching the requirements (CARB, 2010a).

Regulatory Characteristics The ZEBus Regulation introduced by the CARB to radically reduce emissions by public transportation in California has displayed most of the 12 characteristics of properly designed and implemented regulation. To show the degree of applicability, the characteristics are marked with ●. The ZEBus Regulation is strong in terms of the goal-setting, outcome-oriented, stringency, incentive-based, information-driven, participatory, process-based and capability-enhancing characteristics. It is moderate in terms of flexibility, certainty and consistency, and weak in voluntary-based participation.


Table 2. Characteristics of ZEBus Regulation in California Regulatory Characteristics


Level1

Goal-setting

The ZEBus Regulation establishes long-term goals for emission reduction by public transportation in California. The additional goal of GHG reduction has been recommended to be added to the Regulation by the CARB (CARB, 2009b and 2010a)

●●●

Outcome-oriented

The ZEBus Regulation is technology-forcing instead of technology setting. Different pathways are available. Transit agencies can work on solutions based on diesel, electricity, fuel cell, etc. It encourages search for the best technology options which produce the zero-emission outcome

●●●

Stringency

The zero-emission target poses a real challenge and pressure for the automobile manufacturing industry and the transit agencies to search for the most innovative transport technologies in meeting the targets

●●●

Flexibility

The transit agencies have some flexibility in selecting the technology options if they meet the stringent emission standard. Transit agencies are also allowed to implement a joint zero-emission bus demonstration project on a case-by-case basis (CARB, 2009c, p. 11)

●●○

Certainty

When the Regulation was announced, clear time-frames were provided for regulatory compliance (e.g. ZEBus demonstration, and annual fleet acquisition), though the certainty has been weakened somewhat by constant revision of the implementation time frame due to the technological immaturity of ZEBuses

●●○

Consistency

The ZEBus Regulation is highly consistent with the broader air pollution control regulation in California, the ZEV Mandate. Both resemble each other regarding regulatory targets (zeroemission and percentage of acquisition), details of implementation (time-frame for meeting the targets, reporting, etc.), and procedures for drafting, public consultation and amendments (CARB, 2009a, 2009c)

●●○

Incentive-based

Government grants and credit awards have been established to facilitate demonstration and encourage early acquisition of zero-emission buses (CARB, 2009c, p. 14). During the initial demonstration, transit agencies were supported with 54% of the total funding for demonstration of ZEBuses from the government at federal and other levels (CARB, 2009b, p. 8). The financial support offsets the huge costs of fuel cellbuses

●●●

Voluntary-based

Although transit agencies are not allowed to set their own emission standards, the transit agencies are given some flexibility to choose their ways of regulatory implementation, such as the ZEBus technology to use, and who to partner with during the advanced phase of demonstration

●○○

Information-coupling

Transit agencies are required under the Regulation to provide operational and maintenance records of ZEBus demonstrations, and report to the government regularly (CARB 2009c, p. 11). The operational and maintenance data allows the regulators to assess the technology readiness (in terms of durability and reliability). The regulators can better evaluate the maturity of various options and readjust the time-frame for implementation accordingly

●●●

Participatory

Formal procedures are established for stakeholder and public participation. In each round of regulatory exercise, public hearings were conducted to discuss ZEBus technology and the Regulation before and after the drafting of the Regulation. Opportunities are created for the transit agencies and the public to provide feedbacks. Comments are properly addressed and integrated, if necessary, before drafted proposals or amendments become legal

●●●

Process-based

Continuous updating of regulatory requirements has been exercised. Formal procedures have been given to hold workshops and public hearings in each round of the regulatory exercise. This ensures that the Regulation is in phase with the technology development and market availability, and is responsive and reflective of the latest demands and expectations of the key industrial, societal and political stakeholders

●●●

Capability-enhancing

The ZEBus Regulation is complemented by the California Fuel Cell Partnership (CaFCP), a voluntary programme initiated by the California state government. It offers opportunities for organizational learning and networking between the transit agencies, the ZEBus infrastructure and technology providers. The ZEBus demonstration, and the reporting of operational and maintenance data (CARB, 2009c) help the transit companies to progressively acquire the relevant capabilities and skills in the pursuit of zero-emission transport technologies

●●●

Source: Adapted from CARB (2009a, 2009b, 2009c and 2010a) 1 Key: Strong = ●●●; Moderate = ●●○; Weak = ●○○; None=○○○

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Regulatory Impacts on Innovation The ZEBus Regulation has successfully kickstarted the first and second phase of ZEBus demonstrations in California. Although ZEBuses are still at the demonstration stage, it is an important step toward promoting TEI. First, the stringent zero-emission regulatory requirement created a strong pressure to force different stakeholders, including the energy and automobile sector, as well as the transit agencies, to search for the most innovative solutions. The zero-emission requirement is so high that it has pushed all relevant stakeholders to join hands in search of the best solution. This is very important for radical TEIs which demand the support of a critical mass. Second, the early announcement of regulatory implementation sends a clear signal to all relevant stakeholders to act without delay. Without a clear and strong signal, all stakeholders would most likely wait for others to move first, avoid taking risk, and stick to conventional technology due to positive-externalities; other TEI developers and suppliers may also be unwilling to invest because of the uncertainty associated with radical TEIs. Third, the ZEBus Regulation created opportunities for progressive and continuous updates with the support of a process-based regulatory system which allows public participation. It does not have the drawbacks of minimal compliance common in command-and-control (C&C) regulatory approach. Stakeholders have more incentives to integrate TEI development as part of their business strategy. Finally, strong economic incentives in the form of government funding and other capabilityenhanced measures were provided to support the ZEBus demonstration. In the first phase, one demonstration was completed and two others are ongoing, involving a total of 7 ZEBuses. The second phase of advanced demonstration as required by the 2006 Amendments were scheduled to start in late 2009, involving a total of 12 hybrid fuel cell buses in 5 transit agencies in the Bay Area. In addition to these

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efforts, 5 more ZEBuses have been scheduled to be put onto streets in late 2009 or 2010 (CARB, 2010a and 2009a). The ZEBus Regulation has not only prompted fuel cell development and other ZEBus demonstrations in California and other parts of the United States but also reduction in pollutants emissions from these transit buses. Subsequent to the introduction of the ZEBus Regulation, California has witnessed lower nitrogen oxide emissions and an 85% reduction in particulate matter from transit buses as of 2010 (CARB 2010a and 2009a).

Promoting the Adoption of LPG Taxis in Hong Kong: The Role of Air Pollution Control Regulations in Relation to the Diesel-to-LPG Scheme Regulatory Details The second case study examines the adoption of LPG taxis in Hong Kong in early 2000 and the role of Air Pollution Control Regulations and policies in relation to the diesel-to-LPG taxi replacement scheme. Hong Kong’s environmental policies and regulations are heavily C&C oriented (Hills, 2005). In the early 1990s, a government proposal to mandatorily replace all diesel taxis by petrol ones was strongly opposed by the taxi trade, academics, and politicians alike. The diesel-topetrol scheme was put forward to the LegCo by the Planning, Environment and Lands Bureau (PELB) in 1995. Due to the lack of stakeholder support, it was quickly rejected by the LegCo and put on shelve forever (LegCo, 1995). The lack of thorough public consultation prior to submitting the proposed scheme was considered the major cause of the policy failure (Hung, 2002). With the continual worsening of air quality in the late 1990s, and with diesel vehicles being the major source of road-side air pollution (Lau et al., 2007), the government put forward another proposal in 1999


Table 3. Policy/Regulatory Initiatives Introduced During the Diesel-to-LPG Scheme in Hong Kong Incentive-based Initiatives 1

One-off grants to subsidize early replacement of diesel taxis with LPG taxis.

2

Lower fuel cost for LPG compared to diesel, due to fuel tax exemption on LPG and land premium exemption for filling stations solely dedicated to selling LPG

Capability-enhanced Initiatives 1

Consulted the taxi trade early

2

Undertook trial schemes prior to the introduction of the replacement scheme to collect useful operational data and identified potential difficulties encountered by the trade with LPG operations.

3

Identified a number of new sites for the provision of LPG filling facilities

4

Provided an appropriate framework to facilitate LPG vehicle maintenance workshops and training of LPG vehicle mechanics

Regulatory Initiatives 1

Enforced the requirement that all newly registered taxis use LPG

2

Enforced the requirement that all diesel taxis convert to LPG taxis

3

Banned old diesel taxi vehicles running on the streets

4

Progressively tightened emission standards for light diesel vehicles in phase with EU emission standards on diesel engines

5

Stepped up the inspection of smoky vehicles and the enforcement, with increase in fixed penalty

6

Mandatorily installed particulate reduction devices on pre-Euro light diesel vehicles

Source: Adapted from EFB (2000); EMSD (2002)

to replace old diesel taxis with LPG alternatives (ACE, 1999a). Prior to the diesel-to-LPG replacement scheme, the PELB first consulted the taxi trade, promoted public discussion regarding the full scale introduction of LPG taxis, and sought the LegCo’s view (PELB, 1998b). The diesel-to-LPG replacement scheme was linked to a more general and broader policy package introduced in 2000 which aimed at comprehensively reducing vehicular emissions from diesel vehicles. The government planned to replace diesel vehicles with cleaner alternatives wherever practicable, and tighten fuel and emission standards to keep them in phase with stringent international standards (EPD, 2005). Several components were included in the dieselto-LPG replacement scheme. Unlike the previous diesel-to-petrol scheme which was largely C&C in nature, regulatory design and implementation style of the new scheme changed substantially. It became predominantly incentive-based and capability-enhanced, supported with regulatory

back-ups (EFB, 2000 and EMSD, 2002; see Table 3). Before and during the phase-in period in 2000, the government first provided substantial financial incentives in the form of one-off grants and fuel tax differentials to taxi owners and in the form of land premium exemption to LPG fuel suppliers, and organized voluntary programmes to get the stakeholders prepared for the switch. In subsequent years, the emission and fuel standards were progressively tightened (see Table 3 and 4). Two parts of the Air Pollution Control Regulations (APCRs) are specifically related to the Diesel-to-LPG taxi replacement scheme. They target fuel and emission standards. The Air Pollution Control (Vehicle Design Standards) (Emission) Regulations require newly registered motor vehicles to comply with a set of the very stringent emission standards adopted by the United States of America, the European Union and Japan (PELB, 1999). A vehicle cannot obtain registration from the Transport Department if it fails to comply with the emission standards. The Air Pollution Control

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Table 4. Implementation Schedule of the Diesel-to-LPG Scheme for Taxis in Hong Kong Year

Environmental Policies and Regulations

1997

Introduced LPG taxi trial scheme

2000

Launched a one-off subsidy to help diesel taxi operators to replace their vehicles with LPG taxis

2000

Introduced tax concessions - waived land premium for LPG refuelling stations

2001

Tightened the fuel and emission standards to EURO III level for all newly registered motor vehicles under the Air Pollution Control (Vehicle Design Standards) (Emission) Regulation and the Air Pollution Control (Motor Vehicle Fuel) Regulation, with diesel taxis an exemption

2001

Introduced the requirement that newly-registered taxis be fuelled by LPG or unleaded petrol under Air Pollution Control (Vehicle Design Standards) (Emission) Regulations

2002

Tightened the fuel specifications for motor diesel to EURO IV level under the Air Pollution Control (Motor Vehicle Fuel) Regulation

2003

Tightened the emission standards to EURO III level for all newly registered LPG taxis under Air Pollution Control (Vehicle Design Standards) (Emission) Regulations

2003

Air Pollution Control (Emission Reduction Devices for Vehicles) Regulation: all diesel vehicles first registered on or before 1995 must install approved particulate reduction devices

2005

Tightened the fuel specifications for petrol to EURO IV level under the Air Pollution Control (Motor Vehicle Fuel) Regulation

2005

Banned diesel taxis aged 7 years or more from running on the street

2006

Banned all diesel taxis from running on the street

2006

Tightened the emissions standards to EURO IV emission standards for all newly registered LPG or unleaded petrol taxis under the Air Pollution Control (Vehicle Design Standards) (Emission) Regulations

Source: Adapted from EFB (2000); EPD (2005, 2006); ETWB (2003); HKSAR (2006); Ha (2006); Kwok (2005); Panel on Environmental Affairs (2005)

(Motor Vehicle Fuel) Regulation sets out the specifications of motor vehicle fuel and prohibits the supply and sale of vehicle fuels that do not meet the specifications (EFB, 2000).

Regulatory Characteristics The Air Pollution Control Regulations (APCRs) in relation to the diesel-to-LPG replacement scheme display some of the properly designed and implemented regulatory characteristics that promote TEIs. Two air pollution control regulations targetting emissions and fuel control were amended to control vehicle emissions (see Table 4). The APCRs are strong in stringency, consistency, incentive-based, information-based, participatory and capability-enhanced. They are moderate in goal-setting, outcome-based, certainty, weak in flexibility, process update, and display none of the voluntary-based regulatory characteristics.

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Regulatory Impacts on Innovation After the introduction of the comprehensive vehicular emission control programme in 2000, most taxis in the territory were quickly converted to LPG by 2003. By 2005, 5 years after the introduction of the replacement scheme, 99.9% of all diesel taxis operating in Hong Kong had converted to LPG (Panel on Environmental Affairs, 2005). The rapid adoption was attributable to two reasons. First, because of the early announcement of progressive fuel and emission tightening, taxi owners anticipated that their business would eventually be affected. The anticipation for more stringent standards created a strong regulatory pressure and a clear signal to accelerate the replacement. Prior to the tightening of emission standards for newly registered LPG taxis to EURO III under the Air Pollution Control (Vehicle Design Standards) (Emission) Regulations in 2003 and banning of all diesel taxis in 2006 (see Table 4), the taxi trade actively


Table 5. Characteristics of the Air Pollution Control Regulations (Diesel-to-LPG Scheme) in Hong Kong Regulatory Characteristics


Level

Goal-setting

The Air Pollution Control Regulations only focussed on the medium-term goal of forcing taxis to switch to the LPG fuel (from 2000-2006) (EFB, 2000). The pathway after complying with the existing LPG requirements is unclear.

●●○

Outcome-oriented

It tightened emission and fuel standards under the Air Pollution Control Regulations and forced diesel taxis to be replaced by LPG taxis. However, it did not incentivize a continuous search for more innovative solutions.

●●○

Stringency

The fuel and emission standards under APCRs were in tandem with the most stringent standards adopted in EU, USA and Japan (EPD, 2005 and 2006).

●●●

Flexibility

As LPG is the de facto standard under the policy, there is little choice of other technologies. However, the extended phase-in period provided some flexibility in the compliance schedule. For instance, taxi vehicles were exempted from the requirement of EURO III fuel and emission standard applicable for motor diesel vehicles in 2001. The same standard had not been implemented on taxi vehicles until 2003 to give more time for the taxi trade to switch to LPG (EFP, 2000).

●○○

Certainty

The progressive tightening of emission standards was announced before the proposed standards and was enforced as scheduled (ACE, 1999c).

●●○

Consistency

The APCRs governing the emission and fuel standards on taxis is consistent with similar regulations governing other types of diesel vehicles (EPD, 2005). However, the regulatory process is not consistent. There is no formal procedure governing when public consultation and policy update should be made in other environmental regulation exercises.

●○○

Incentive-based

LPG fuel tax exemption and attractive one-off subsidies for diesel-to-LPG replacement prompted quick retirement of diesel taxis before mandatory implementation (EFB, 2000; EMSD, 2002).

●●●

Voluntary-based

The APCRs were primarily designed for a one-off switch to LPG taxis. They do not promote continuous and voluntary upgrade of the emission/fuel standard through innovation.

○○○

Information-coupling

LPG taxi trials were conducted with the taxi trade to collect important operational data. It provided useful information for the regulators to evaluate the costs/benefits, operational characteristics of LPG taxis. It helped the regulators to formulate the requirements for the switch (PELB, 1998a; TB, 1997).

●●●

Participatory

Consultation and partnership were found between the taxi trade, the government, as well as other stakeholders (PELB, 1998a, 1998b and 1999) during the trial scheme, policy and regulatory introduction and implementation.

●●●

Process-based

The APCRs were not dynamic and process-based. While consultation and partnership facilitated the stakeholders to switch to LPG taxis, the authority did not offer formal procedures to initiate public hearings and to respond to the public’s queries or suggestions. As the regulation mandates a once-for-all switch, the authority largely determined the regulatory standards and pathway. They did not build in mechanisms to review the regulatory conditions, stakeholder views or new technologies.

●○○

Capability enhancing

Trial programmes, seminars and trainings, and infrastructure support were provided to help the taxi trade to transit towards LPG. Stakeholders, such as fuel suppliers, vehicle suppliers became familiar with the LPG technologies more quickly. The government also responded quickly to the need for developing more LPG fuelling stations upon the trade’s demand (EMSD, 2002)

●●●

Source: Adapted from EFB (2000); EPD (2005 and 2006); EMSD (2002); PELB (1998a, 1998b and 1999); TB (1997)

participated, negotiated with the government, and quickly retired their diesel vehicles. Second, the Air Pollution Control Regulations in relation to diesel-to-LPG replacement are carefully supported by thorough public consultation, strong incentive

package and various capability-enhanced policy measures (see Table 3). The enforcement of the policy did not provoke resistance from the trade and accelerated the adoption of the cleaner LPG technology.

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The regulatory and policy measures bore fruit. The LPG technology for taxis was very mature at the time of adoption. The scheme did not encounter major technological and market constraints as experienced by the zero-emission fuel cell vehicles in California. The rapid adoption of LPG taxis makes it a rather successful case of TEI adoption in Hong Kong (Hills, Gouldson and Welford, 2008). Together with other policy measures introduced to reduce road-based transport emissions, some success in terms of emission reduction had been witnessed. Compared with 1999, the roadside concentrations of the major air pollutant emissions, namely respirable suspended particulates (RSP) and nitrogen oxides (NOx), reduced by 22% and 23% respectively in 2008. The number of smoky vehicles spotted dropped by about 80% (EPD, 2005).

COMPARING TEI PROMOTING REGULATIONS IN CALIFORNIA AND HONG KONG The discussion in Section 5.1 and 5.2 compares and contrasts the TEI promoting regulations in California and Hong Kong. Section 5.1 identifies the similarities shared by two regulations in TEI promoting regulatory characteristics that prompted the successful development and adoption of cleaner fuel transport technologies in California and Hong Kong. Section 5.2 identifies the differences they displayed.

Similarities in TEI Promoting Regulatory Characteristics Both the ZEBus Regulation in California and the Air Pollution Control Regulations in relation to diesel-to-LPG scheme introduced in Hong Kong are strong in stringency, certainty, incentive-based, information-coupling and capability-enhancing: Highly stringent and certain: Innovation oriented regulations in both cases set stringent

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standards. In California’s ZEBus Regulation, the emission standard is set at zero. It poses a really big challenge and forces the industry to seek the most innovative environmental solutions. The certainty of mandatory regulations makes it impossible for stakeholders to hold on to the waitand-see attitude towards TEI. As evident in both case studies, the pressure accelerated stakeholders work out the solution in a concerted manner. The affected regulated parties would not want to risk the cost of non-compliance. In California, any fleet which exceeds the emission requirements will not be allowed to operate on the street; and in Hong Kong, the early announcement of more stringent standards sent a strong message to the taxi trade that old diesel taxi fleets would soon be phased out. Without the regulatory force, it would have taken much longer and be more difficult to unite relevant stakeholders to work together and get them agree on the same goal, especially when they have very diverse vested interests. Highly incentive-based: The regulations in both cases are complemented by financial and economic incentives. Under the California ZEBus Regulation, the demonstration of zero-emission buses is heavily funded by the federal or other levels of the government. Credit awards accrue to transit agencies that are early adopters of ZEBuses. In Hong Kong, the purchase of LPG taxis as anticipated by progressive tightening of relevant Air Pollution Control regulations was partially subsidized in the form of one-off grants and fuel differentials. These incentive packages have been introduced to support the stringent regulatory requirements. As financial obstacle is a big hurdle to TEIs, especially for radical innovation like zero-emission fuel cell buses, which are very costly given its technological and market immaturity, the provision of financial incentives is critical to the success of TEIs in both cases. Highly information-coupled: The adoption of TEI involves changing not only the technology but also the operation patterns, the skill set of supporting staff and cost-effectiveness assess-


ment. A lot of these details and problems cannot possibly be predicted in advance in the planning of the regulation. However, they are critical to the success of TEI. As a result, the collection and sharing of information from trial schemes and periodic feedbacks are very important to the removal of potential obstacles, and to the success of TEI adoption. The California regulators made use of operational/maintenance data to assess the readiness of the ZEBus technologies. In the case of Hong Kong, before the introduction of any regulatory and incentive scheme in 2000, the government conducted a trial scheme to collect useful statistics regarding the cost and technological/technical performance of LPG taxis. Such information helped regulators to determine if LPG vehicle technology was suitable for taxi operation and how likely it would be that the taxi trade could meet more stringent air pollution control regulations. Highly participatory: Innovation-oriented regulations in both cases involve stakeholder participation. The lack of stakeholder participation is a major drawback of the C&C regulation. Without participation in the regulatory process, mistrust and miscommunication can occur. As the goal of TEI regulation is to facilitate wider adoption of TEI among end-users, it is often desirable to let these stakeholders experiment and have channels to work with the regulators. In California’s ZEBus Regulation, formal participatory procedures are established so that stakeholders and the public can participate and provide feedback prior to and after the implementation or amendment of the Regulation. In the case of Hong Kong, the government learned from the failure of an earlier diesel-to-petrol scheme, which was largely due to the lack of consultation with the trade and other stakeholders. When the authority put forth the diesel-to-LPG replacement proposal, substantial in-depth consultations with all types of stakeholders, particularly the taxi trade, legislators and government departments were conducted prior to the announcement of the scheme and the imple-

mentation of regulations. The consultation with the taxi trade started during the taxi trial scheme and continued throughout the entire regulatory process. Highly capability-enhancing: Innovationoriented regulations in both cases are highly capability-enhanced. The California Fuel Cell Partnership (CaFCP) has strongly facilitated the regulatory implementation, particularly the ZEBus demonstration. The CaFCP comprises of members from the automotive and energy industries, fuel cell technology companies, and government institutions. It has offered a platform for learning and networking, and created funding opportunities to facilitate transit agencies to demonstrate zeroemission fuel cell buses. The reporting requirements of zero-emission demonstration project as specified in the Regulation also help to ensure that transit agencies will develop relevant capabilities to fulfill the demonstration requirements. In Hong Kong, the provision of an incentive package, the LPG taxi trial, the provision of relevant technical training programmes, and the efforts in ensuring availability of sufficient LPG fuel infrastructure, have allowed the taxi trade to acquire relevant capacities and capabilities in adapting to the new LPG technology.

Differences in TEI Promoting Regulatory Characteristics Important regulatory differences have been noted between the two case studies. Obviously it will not do justice to either study by directly comparing these two regulations. They differ significantly in scope and scale. However, these differences can still inform us of characteristics of innovationoriented regulations. The ZEBus Regulation displays strong innovation-oriented regulatory characteristics in all of these aspects, as compared with the Air Pollution Control Regulations in Hong Kong. The major differences lie in goal-setting and process-based regulatory characteristics.

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Goal-setting: The ZEBus Regulation in California has a much more long-term vision than the Air Pollution Control Regulations in relation to the diesel-to-LPG scheme in Hong Kong. Although both regulations target emission-control, the ZEBus Regulation is more stringent than the Air Pollution Control Regulations. By pursuing the goal of zero-emission, the ZEBus Regulation places pressure on the automotive industry to continuously search for the most innovative solution to meet the highest target in a cost-efficient manner (Porter and van der Linde, 1995a and 1995b). Although the Air Pollution Control Regulations in Hong Kong are designed to keep the latest local fuel and emission requirements in tandem with those set for motor vehicles in Japan, EU and USA, it is still not as stringent as the zero-target. Further, there is more uncertainty about when and how these standards will change in those countries. The Air Pollution Control Regulations are inclined towards the LPG option (see Table 4). Although LPG is a cleaner option, it does not encourage the taxi trade to continuously search for other better options. The ZEBus Regulation is more closely aligned with statewide regulations and policy objectives which vigorously pursue aggressive environmental goals and drastic actions for environmental improvements, as compared with the Air Pollution Control Regulations. The early goal set by the ZEBus Regulation for emission reduction is closely connected with the ZEV Mandate2, which aligns with the goal for long-term improvement of air quality in California (Collantes and Sperling, 2008). The latest draft recommends that the Regulation aligns with the broader regulatory objectives set by the ZEV Mandate1, by expanding the existing goal of emission reduction to address climate change and GHG reduction. The Air Pollution Control Regulations in Hong Kong also align with other broader policy objectives such as the comprehensive vehicular emission control policy package which aims at reducing emissions particularly from diesel vehicles. However, the

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broader policy package focusses narrowly on emission reduction and fails to deal with critical issues such as climate change. The Air Pollution Control Regulations in Hong Kong are therefore much more limited in inducing TEIs that offer a higher potential for environmental improvement than the California ZEBus Regulation. Process-based: The ZEBus Regulation is supported by a process-based rule-making process which includes preparing, drafting, reviewing, and enacting the regulation (CARB, 2010b). Procedures for consultation with the regulated industries and the public are formalized. Further, the process-based regulatory system ensures that the Regulation is constantly updated based on accurate technology assessment of the commercial readiness of the technology and stakeholder’s feedback (CARB, 2009d). As such, the Regulation enacted is more reflective of the constraints and opportunities of the technology market, and more responsive to the expectations of stakeholders. The process-based regulatory approach has at least two distinctive advantages in relation to innovation and cost. By adjusting the regulatory requirements based on the updated technology assessment and feedback, the amended regulatory target can better take into account any market barriers and other constraints encountered by stakeholders. For instance, in the latest amendment, the CARB have identified a constraint encountered by the regulated transit agencies, and have ruled that the 15% purchase requirement be delayed until the technology achieves commercialreadiness (CARB, 2009d). The delay in regulatory implementation shields the transit agencies from additional cost due to market immaturity, and allows the regulated parties to search for the first best option that meet the regulatory requirement. In Hong Kong, environmental regulations are not supported by a process-based regulatory system. There is no guarantee that the public or regulated stakeholders will be thoroughly consulted prior to and throughout the regulatory process. Although the diesel-to-LPG replacement scheme


Table 6. Comparison of TEI Promoting Regulatory Characteristics in California and Hong Kong

Regulatory Characteristics

California’s Zero-emission Bus Regulation

Hong Kong’s Air Pollution Control Regulations in Relation to Diesel-to-LPG Scheme

Goal-setting

●●●

●●○

Outcome-oriented

●●●

●●○

Stringency

●●●

●●●

Flexibility

●●○

●○○

Certainty

●●○

●●○

Consistency

●●○

●○○

Incentive-based

●●●

●●●

Voluntary-based

●○○

○○○

Information-driven

●●●

●●●

Participatory

●●●

●●●

Process-based

●●●

●○○

Capability-enhanced

●●●

●●●

had thorough public consultation, such consultation is far from being the norm and has not been translated to other environmental regulations. No formal procedures have been established. Regulations enacted under a non-process-based situation will provide little room for regulatory update, which is critical to avoid unintended technological, financial or other barriers. The absence of a process-based approach explains why additional transport TEIs cannot be seen in Hong Kong after the adoption of LPG taxis.

CONCLUSION This study reviews and discusses the debate over the effectiveness of environmental regulation in promoting industrial TEIs. As various theoretical and empirical studies have illustrated, environmental regulations, if properly designed, can promote more cost-effective TEIs. This paper has explored how environmental regulations can be designed and implemented in a way that promotes TEIs? First, based on previous innovation research, 12 characteristics of innovation oriented regulations are identified. These are then used

to examine how these characteristics promote transport TEIs under two sets of regulations in California and Hong Kong. The California ZEBus Regulation has successfully pushed forward fuel cell bus demonstration and development among transit agencies. The second case study is the diesel-to-LPG taxi replacement scheme in Hong Kong. The entire taxi fleet in Hong Kong was converted from diesel to LPG technology just a few years between 2000 - 2006. Both studies demonstrate that regulatory pressure induced by stringent requirements and early announcement of progressive tightening, and a clear time frame for implementation, can reduce uncertainty and risk and actively mobilize stakeholders to continuously innovate to enhance their environmental performance. In such cases regulations are able to send a strong signal and create a level-playing field for industries to compete by means of TEIs. Further, in both cases, TEI promoting environmental regulations do not consist solely of direct regulatory standards, but are strongly supported by incentive-based and capability-enhancing measures to equip the industry with the capability to embrace TEIs.

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The regulations examined share a number of the common characteristics, including: high stringency, certainty, incentive-based, information-sharing, stakeholder participation, and capability-enhanced. In California, its stringent zero-emission requirement pushes the industry to pursue innovative instead of end-of-pipe solutions since the very beginning. The clear road map, phase-in periods and deadlines for various targets have sent a clear signal that the authority is determined to execute the plan and the industry has to act without delay. The regulation is backed up by strong incentives to facilitate demonstration and encourage early acquisition of ZEBuses. It is also information-driven, and capability-enhanced, particularly with the support of California Fuel Cell Partnership. Regulatory requirements are revised continuously throughout the regulatory process upon feedback from the industrial stakeholders. Hong Kong’s APCRs governing the diesel-toLPG taxi switch programme mandate taxis to keep pace with the most stringent international fuel and emission standards. The high certainty of the APCRs is realized by early announcement of the emission standard tightening. Financial incentives in the form of subsidies and fuel tax differentials were provided to win the support of the taxi trade. It has been highly information driven. Regulators gathered information about the LPG technology and operational characteristics from trial schemes to guide regulatory decisions. The engagement of and consultation with the taxi trade and other key stakeholders throughout the process enable relatively smooth deployment of LPG taxis and the setup of LPG infrastructure. Operational training seminars were organized to enhance stakeholder capability in dealing with the new TEI. Important lessons have also been learned from the regulatory differences between the two case studies, leading to different outcomes in some aspects. Comparatively speaking, the ZEBus Regulation has the more far-reaching goal of aligning with other important statewide policies

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and regulations related to air quality and climate change. The APCRs, in comparison, has a more limited scope in controlling vehicle emissions in Hong Kong. The long-term vision makes the ZEBus Regulation favourable to TEI promotion in the long run. It triggers off continuous search for innovative solutions, whereas the APCRs have not generated continuing interest in technology upgrades after the one-off switch. Further, the process-based ZEBus Regulation provides formal procedures for stakeholder consultation in regulation drafting and reviewing. It allows constant feedback and update to regularly amend the regulations and policy. This is especially critical for any TEIs which have not yet reached technological or market maturity. In Hong Kong, though stakeholder engagement was seen in the regulatory process in relation to the diesel-to-LPG replacement scheme, it is considered as an exception. There is no guarantee that similar process will be found in other similar regulatory exercises.

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Gouldson, A., Hills, P., & Welford, R. (2008). Ecological modernization and policy learning in Hong Kong. Geoforum, 39, 319–330. doi:10.1016/j.geoforum.2007.07.002 Gouldson, A. P., & Murphy, J. (1998). Regulatory realities: The implementation and impact of industrial environmental regulation. London, UK: Earthscan. Ha, K. (2006). Diesel emissions control in Hong Kong. Paper presented at the Motor Vehicle Emissions Control Workshop (MoVE) 2006. Retrieved on 27 March, 2010, from http://www. cse.polyu.edu.hk/~activi/MoVE2006/ppt/Session%201/1-4.pdf Hills, P. (2005). Environmental reform, ecological modernization and the policy process in Hong Kong: An exploratory study of stakeholder perspectives. Journal of Environmental Planning and Management, 48(2), 209–240. doi:10.1080/0964056042000338154 Hitchens, D., Birnie, E., Thompson, W., Triebswetter, U., Bertossi, P., & Messori, L. (2000). Environmental regulation and competitive advantage: A study of packaging waste in the European supply chain. Cheltenham, UK: Edward Elgar. HKSAR (Hong Kong Special Administrative Region Government). (2006). Appendix. Sixth Ministerial Meeting, World Trade Organization. Hung, W. T. (2002). An action model of publicprivate partnership for cleaner air in Hong Kong. Paper presented at Better Air Quality 2002, Regional Workshop on Better Air Quality in Asia and Pacific Rim Cities, 16-18 December 2002. Jaffe, A., Newell, R., & Stavins, R. (2005). A tale of two market failures: Technology and environmental policy. Ecological Economics, 54(2-3), 164–174. doi:10.1016/j.ecolecon.2004.12.027

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Mol, A. P. J., & Spaargaren, G. (2000b). Ecological modernization theory in debate: A review. In Mol, A. P. J., & Sonnefeld, D. A. (Eds.), Ecological modernization around the world. UK: Frank Cass Publishers. Murphy, J., & Gouldson, A. (2000). Environmental policy and industrial innovation: Integrating environment and economy through ecological modernization. Geoforum, 31, 33–44. doi:10.1016/ S0016-7185(99)00042-1 Norberg-Bohm, V. (1999). Stimulating green technological innovation: An analysis of alternative policy mechanisms. Policy Sciences, 32(1), 13–38. doi:10.1023/A:1004384913598 Panel on Environmental Affairs (Legislative Council). (2005). Background brief on air pollution control. Special meeting on 29 September 2005. Retrieved on 27 March, 2010, from http:// www.legco.gov.hk/yr04-05/english/panels/ea/ papers/ea0929cb1-2304-6-e.pdf PELB (Planning, Environment and Lands Bureau), HKSAR. (1998a). Pilot scheme for liquefied petroleum gas taxis. Panels on Environmental Affairs and Transport, Provisional Legislative Council. PELB (Planning, Environment and Lands Bureau), HKSAR. (1998b). A proposal to introduce LPG taxis-a consultation paper. Submitted to Panels on Environmental Affairs and Transport, LegCo. (LC Paper No. CB(1) 412/98-99 (09)).

PELB (Planning, Environment and Lands Bureau), HKSAR. (1999). Proposed amendments to air pollution control. Panel on Environmental Affairs, Legislative Council. Porter, M. E., & van der Linde, C. (1995a). Green and competitive: Ending the stalemate. In Wubben, E. F. M. (Ed.), The dynamics of the eco-efficient economy (pp. 33–55). Cheltenham, UK: Edward Elgar. Porter, M. E., & van der Linde, C. (1995b). Towards a new conception of the environmentcompetitiveness relationship. The Journal of Economic Perspectives, 9(4), 97–118. TB (Transport Bureau). (1997). Operation of the octopus/trial of taxis using liquefied petroleum gas (LPG). Submitted to Panel on Transport, Provisional Legislative Council. (TRAN 3/10/28(97) Pt.5).

ENDNOTE 1

The ZEV Mandate expands its regulatory goal to include Greenhouse Gas (GHG) reduction, in response to California Governor’s Executive Order S-03-05, requiring a reduction in statewide GHG reduction to 80% below the 1990 levels by 2050 in response to climate change (CARB, 2009a).

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Chapter 4

Quantifying Sustainability:

Methodology for and Determinants of an Environmental Sustainability Index Kobi Abayomi Georgia Institute of Technology, USA Victor de la Pena Columbia University, USA Upmanu Lall Columbia University, USA Marc Levy CIESIN at Columbia University, USA

ABSTRACT This chapter consider new methods of component extraction and identification for the Environmental Sustainability Index (ESI) – an aggregation of environmental variables created as a measure of overall progress towards environmental sustainability. Principally, the authors propose and illustrate a parametric version of Independent Component Analysis via Copulas (CICA). The CICA procedure yields a more coherent picture of the determinants of environmental sustainability.

INTRODUCTION Shrinkage methods - statistical dimension reductions – are important and popular alternatives to numerical models in fields as diverse as climatology, psychology and econometrics. The objective in these methods is to identify a subset of coordinates that sufficiently describe the evolution of specific state variables. From an applied

perspective, the goal is to identify (possibly lower dimension) versions of multivariate data via the extraction of salient characteristics. The data may then be recast, modulo these characteristics, as input to further modeling. From a theoretical perspective, the proposition of a method for dimension reduction depends upon the declaration of characteristics that can offer a sound basis for extraction.

DOI: 10.4018/978-1-60960-531-5.ch004


Quantifying Sustainability

Breiman states – Statistics starts with data; improved methods can illustrate latent phenomena and uncover alternative metrics in extant data [Breiman 2001]. This statistical duality, the hysteretic iteration of statistical theory and data application, is especially instrumental in emerging fields where functional and causal representations are sparse. Social indexes, in particular environmental indexes, seek to describe as well as predict phenomena that are often poorly measured and ill-defined. An index is a metric, often at administrative levels, used to characterize a latent quality. Gross Domestic Product (GDP) and of the Dow Jones indexes are common economic indices; Pacific Decadal Oscillation (PDO) and El Nino ([Francis 1998], [Gershunov1998]), climatological indices; the National Threat Level could also be called an index. Example environmental indices are the Natural Disaster Hotspots report [CHRR-World Bank 2005]; the Human and Ecosystems Wellbeing Indexes - (HWI) and (EWI) [Prescott-Allen 2001]; and the United Nations Human Development Index - (HDI) [UNDP 2006]. A goal for these environmental indices is the extraction of salient, perhaps latent, characteristics that describe or predict the elusive and undefined sustainability concept. A fortiori, the identification of as yet unmeasured information can illustrate the appropriate experimental design and thus guide future measurement (See Fuentes et al. [2007] for a creative example using Bernardo’s [1979] fundamental comment on information maximization as a criteria). Independent Component Analysis (ICA) - and the special case Principal Component Analysis (PCA) - extract uncorrelated and statistically independent components - or bases - of multivariate data. In ICA the model is explicit - the observed data are mixed independent sources; in PCA, implicitly, the data are mixed multivariate Gaussian. These component analysis procedures are used to reduce dimension – by yielding a lower order basis – and to parse or elucidate latent factors.

Environmental data are often non-Gaussian, and frequently – characteristically – extreme value [Meyers and Ganipati 2006]. Researchers apply an array of approaches: from spatial-temporal processes [Stein 2007], to stochastic optimization [Tsai and Chen 2004], and hierarchical models [Lin, Gelman, Price,and Krantz 1999]. Environmental statisticians rely upon a suite of statistical methodologies as the underlying processes are complex (as in transport phenomena), multiple (as in wastewater treatment), or latent (as in ecology). Environmental statisticians face particular challenges in modeling environmental processes; these are typically ‘out-of-control’ and require more sophisticated assumptions. While the concept of sustainability has been widely embraced, it has been defined only vaguely and has proven difficult to measure with any consensus. There is a critical need for sustainability indicators; environmental statisticians have a stake in making the broad concept of sustainability operational. Researchers can justify an increased focus by providing specific measures – which decision makers can use and the public can judge – of progress or failure. In this chapter we illustrate the 2002 Environmental Sustainability Index and exploit its dependency structure using a new version of ICA – Copula Based Component Analysis (CICA) – to extract a reduced component set as the determinants of environmental sustainability. This approach is designed to highlight important information, suggest some focal metrics, and discredit others. A unifying definition for an index, in the context of this paper: a function that maps disparate multivariate data onto a scalar at administrative units. An index should be: 1. Transparent: The methodology use to construct the index should be clear and unambiguous. Assumptions and decisions that affect index values (`scoring’) should be well stated.

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Table 1. Components of the 2002 Environmental Sustainability Index Environmental Systems (13 variables) Measurements on the state of natural stocks such as air, soil, and water Environmental Stresses (15 variables) Measurements on the stress on ecosystems such as pollution and deforestation. Vulnerability (5 variables) Measurements on basic needs such as health, nutrition, and mortality. Capacity (18 variables) Measurements of social and economic variables such as corruption and liberty, energy consumption, and schooling rate. Stewardship (13 variables) Measurements of global cooperation such as treaty participation and compliance.

2. Reproducible: The algorithm or method used to generate the index – the list of scores and ranks for a set of administrative units – should be replicable on similar data. 3. Defensible: The elements and variables of the index should map to concepts the index claims to measure.

THE 2002 ENVIRONMENTAL SUSTAINABILITY INDEX (ESI) The 2002 Environmental Sustainability Index (ESI) was created as a measure of overall progress towards environmental sustainability and designed to permit systematic and quantitative comparison between nations [World Economic Forum 2002]. The ESI is a scaled linear combination of 64 variables of environmental concern. Environmental measures (such as oxide emissions and concentration) are included along with political indicators relevant (such as civil liberty and level of corruption) that are relevant to environmental sustainability [World Economic Forum 2001, 2002]. The 2002 ESI is defined as:   Y − Y   1  j 1 j   . ESI = 100 * Φ   ∑ ∑ | K | k ∈K | J k | j∈ J k  S y   j  (1) Here: J k is the index set for the variables in the kth ìndicator’ of the ESI: the ESI is averaged over the ìndicators’; the ESI `components’ are a

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heuristic grouping, not used in calculating the index; K is the index set for the indicators; | K | and | J k | are the number of indicators and number of variables in the kth indicator; Y j is the sample

mean for variable j – across countries, S y is the j

sample standard deviation for variable j, Φ is the inverse standard normal distribution function. See Table 1. The ESI, like other indices of environmental concern (such as the environmental wellbeing index (EWI), and the human development index (HDI)) condenses dissimilar social and physical metrics into cohesive summaries for national level comparisons [Prescott-Allen 2001, Osberg 2002]. The goal for the ESI is to capture the most recent version of available data to get the best, most recent, snapshot. The approach is to use the most recent year available for each variable at each country. The breadth of the ESI - 64 dissimilar variables from varied sources - presents aggregation and processing challenges: in particular missing values (missingness) and complex dependencies. Some variables are composites of information from several sources: pollutant yield divided by land area conditioned on population density, for variables in the Ènvironmental Systems’ and Ènvironmental Stresses’ indicators - for example. Others may be imprecise across observations: mortality and disease variables in the `Vulnerability’ indicator, for instance. See Annex 1 and Annex 2 of the 2002 ESI report for elucidation [World Economic Forum 2002].


Constructing the ESI using only available cases would have severely restricted its scope; yet it was important to have a reasonability check for the imputations, In Abayomi [2008] we look at the fit of a chained equation imputation model to the completed data and we suggested post hoc diagnostics designed to account for inconsistency and missingness in multivariate data collected from multiple sources. The ESI was calculated, using the equation in (1), on the completed – post-imputation – data. The use of the inverse standard normal distribution in (1) guaranteed scores on the range 0-100; scaling each variable by its sample standard deviation set the contribution of each in deviation units; combining variables in groups before average allowed each component to have equal contribution to the overall score. Generally, countries with higher GDP scored higher in the ESI – though the relationship is not perfect. For example, the United States scored lower than Canada, and China scored lower than Australia. An illustration of the final, completed data ESI is in Figure 1.

CICA FOR DETERMINANTS OF ENVIRONMENTAL SUSTAINABILITY The Component Analysis Procedure Given multivariate data x k , the goal in Principal Component Analysis (PCA) is to find the linear transformation (i.e. rotation matrix), y = Bx , that minimizes the off-diagonal variance of y . When Σ = ((Cov( yi , y j )))i, j =1..k is the covariance matrix of x k the very well known result is to generate

the Eigenvectors for Σ = et Λe : Λ is a diagonal matrix of Eigenvalues - which yields yi = et x , with Cov(y_i,y_j) = 0, i ≠ j , or the rotation which yields linear independence (see Johnson and Wichern [1998] for a comprehensive take).

Figure 1. The 2002 ESI. Darker color indicated a higher, more ‘sustainable score on the index. Canada and Norway, for example, are more ‘sustainable’ than China or the United States

Multivariate analysis via PCA is a venerable member of the statistical canon; PCA results are often intermediate steps in larger investigations where the component outputs may be inputs in standard predictor-response models or more generalized ‘indices’ of higher order measurements. See Oja [1992], for example. In Independent Component Analysis (ICA) the minimization of off-diagonal variation in y is strengthened to statistical independence, beyond the second order condition. Here, the goal is to find the linear transformation (i.e. rotation matrix) of x k , y = Bx , such that the observed yi = bi x are nonlinearly correlated (in the maximal correlation sense [see Hyvarinen 2001]) of y j = b j x ; here the model for statistical independence is explicit. The observed data are modeled as mixed outputs x = As , of independent sources s . The columns of Y are the estimates of these independent components, or signals; which the rotation B is an estimate of A−1 . See Figure 2, a la Cardoso [1996]. Typically, independent signals s are observed via unknown full rank rotation A as x . The ICA/BSS procedure yields y = s outputs as estimates of the independent signals. The distribution of the inputs and outputs should be proportional.

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Figure 2. Diagram of Independent Component Analysis (ICA) mixing and separating matrices

In the simplest ICA models - including Blind Signal Separation (BSS) - the number of signals is equal to the number of sources: the rotation matrix is of full rank.

The Copula Approach A copula is a multivariate distribution on marginal distribution functions—a distribution function on a k − dimensional cube—and holds the dependency of the full joint distribution. In illustration: take two random variables X 1 ~ FX , X 2 ~ FX . 1

Independent Component Analysis (ICA) can be cast as a generalization of the PCA program where more general versions of statistical independence succeed covariation and thus uncorrelatedness (Jutten and Herault [1991]). In both versions the objective is the recovery of the linear rotation A of the independent signals, x . The difference is the characterization of statistical independence or contrast function, and the implicit or explicit distributional assumptions on the inputs (See Cardoso [1993], Brunel et al. [2005]). ICA extends independence beyond covariance. While zeroed covariation is sufficient for independence under the Gaussian assumption typically operant in PCA, when dependency is not appropriately captured by the second moment, covariance is an insufficient proxy for statistical independence. For a simple example, take functional dependency xi = h( x j ) = x j 2 , for example, E( xi ) = 0 . Here $Cov(x_i,x_j) = 0$ though $x_i,x_j$ are completely statistically dependent. ICA can be seen as PCA under a more general contrast function, based on an alternate measure. In PCA we seek the linear rotation that minimizes covariance; in ICA we seek the rotation that minimizes, for example: entropy, mutual independence, higher order de-correlation, etc. (Cardoso [1996]).

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2

A copula is a function that takes the ‘grades’ as arguments—the pair (U , V ) are the ‘grades’ of ( X 1, X 2 ) --- and returns a joint distribution function C(U , V ) = FX , X , 1

2

with marginals FX , FX . In a simple illustration, the

1

2

Gumbel-Hougard

copula—

Cθ (u, v) = (u + v − 1) + (1 − u)(1 − v) * e−θ ln(1−u ) ln(1−v )

—is easily derived from the bivariate exponential distribution: H θ ( x, y) = 1 − e− x − e− y + e−( x+ y +θxy ) . Notice if θ = 0 , then Cθ (u, v) = uv ...the independence copula. The copula families of multivariate distributions, those where a candidate joint distribution is evaluated on a set of univariate marginals, are functions from I k to I . As densities -- full derivatives -- copulas are the ratio of the joint density to the product of the univariate marginals (see Nelsen [1999]). In this sense the copula representation captures the dependence within x : the value of the copula is the proportion of dependence to full independence. This proportion is maximal when there is no gain to modelling a multivariate


x ; each element xi , separately, is sufficient. This property, in particular, recommends the copulae family as a fertile point of departure for dependence models. We use parametric copulae families as estimators for the dependency in x under broad dependence conditions. Specifically, the copula approach offers a generalized ‘engine’ for the contrast functions - measures of statistical dependence - which characterize ICA analysis. This yields a copula based version of Independent Component Analysis (CICA) - where we model and rotate dependency information in x via copulae families. This version - CICA - replaces non-parametric, higher order proxies for independence with parametric examples from the copula literature. This parametric modeling appeals: 1. To the duality between information minimization within the component outputs and likelihood maximization for the rotated source model and 2. To the partitioning of the full likelihood of the outputs into model fit and dependence minimization. Here, we can construct ICA via copula based measures of association on partite reductions of x - in direct analogy to the PCA via covariance matrix we can view the ICA procedures as orthogonalizations of higher order tensors to capture non-elliptical dependence. The flexibility of partite reduction allows us to suggest appropriate copula families for non-gaussian dependence pathologies - specifically extreme value, nonmonotone and inhomogenous data - within a multivariate set. This is a consistent framework for fully parameterized ICA.

Copulas in ICA The copula measure of dependency is defined via its density, on a multivariate x = ( x1,..., xk ) ,as dFx (x)

dC(x) =

∏ dF

xi

( xi )

(2)

is the multivariate copula density for x . Here dC(x) is the full derivative of a distribution function which takes the marginal distributions Fx ,..., Fx as its arguments. The copula distribuk

1

tion, then, is a distribution function on the space of the marginals to the unit hypercube, ( FX ,...FX ) I k . k

1

The mutual information (see Kullback [1959]), for a multivariate X with distribution function F(X) is

MI (x) ≡

∫

Ω

dF (x)log(

dFX

∏ dF

)

(3)

Xi

where Ω is the probability space for X . Using equation (2) above, this can be re-expressed as MI (X) ≡

∫

Ik

dCθ (u)log(dCθ (u)) = MI (u) = E(log(dCθ (u)))

(4)

W h e n T ~ F , dF = f t h e n −H (T ) = E( f (T )log(T )) is called the entropy for t (see Ash 1965) and here, MI (X) = −H (u) =

∫

Ik

dC(u)log(dC(u)) (5)

The mutual information then—as the expected value of the log of the copula density—can be computed, or estimated, from a parametric copula. The mutual information then - as the expected

79


k

value of the log of the copula density, can be computed, or estimated, from a parametric copula In the PCA/ICA literature, contrast functions are objective functions for source separation: let ψ(Y) = 0 imply Yi and Y j are independent ∀i

K(dF , ∏ dFi ) = MI (X)

≠ j —then ψ is a particular contrast function. The minimization of functions of these types is the essence of the PCA/ICA algorithm. Essentially, this approach demonstrates a role for the copula as the apparatus for these contrast functions, which exploits its natural appearance in measures of association, here the mutual information, and as a model for dependence/independence. This is choosing the mutual information as the engine for the ICA contrast function. This is a special case the component analysis problem via minimization of a \ parametric probability distance. This yields symmetry with the principles of likelihood maximization and employs a decomposition of the Kullback-Liebler distance.

K(y, s) = K(y, y * ) + K(y * , s).

Kullback-Liebler as Dependence Distance The Kullback-Liebler [Kullback 1959] divergence between two probability density functions f (t) and g(t) we notate K( f , g ) =

∫

t

f (t)log(

f (t) ) g(t)

(6)

between two probability density functions, f (t) and g(t) . The mutual information is a special instance of the Kullback-Liebler (K-L) probability distance between independence and dependence. If X k is k − dimensional multivariate with density function dF and marginal distributions dF1,..., dFk then

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(7)

i =1

A classic property of (7) is its decomposability (8)

with y * a random vector with independent entries and margins distributed as Y ; S is an independent vector. In the component analysis procedure—with y the outputs and S the unobserved sources—the total distance between the model and the outputs is decomposed into the deviation from independence of the outputs K(Y, y * ) and the mismatch of the marginal distributions K(Y* , s) .      +  =    Marginal     Deviation from    Total                   n ce Mismatch Mismatch Independe                 (9)

Setting u* = G(y * ) — G our best estimate for the marginal distributions of y --- where y * is still a random, mutually independent vector with margins distributed equivalently with y . Thus, u* is independent with margins distributed as y . Then the KL distance is: K( u, u) = K( u, u* ) + K(u* , u)

(10)

with u the estimate of the true sources.

The CICA Algorithm: Full Model, via Estimating Equations This approach yields estimating equations, equations for the parameters of the component analysis model. In this full CICA method – we derive estimating equations for the mixing parameter B


Figure 3. Left Hand Panel: CICA model applied to Gumbel-Hougard dependency gradient; Right Hand Panel: Log Mean Integrated Squared Error (MISE) of typical ICA (fastICA) and CICA models

in the model Y = BX by minimizing the KL distance (i.e. maximizing the likelihood). Under fixed assumptions about the distribution of the sources, two terms are minimized: the true objective, the mutual information, expressed via the copula; the mismatch of the marginal distributions to the assumed distributions. Write the independence term as min B MI(y; B) = min B E(log(dCΘ (u)))

(11)

k

(12)

i =1

That is, minimize the mutual information via ˆ−1 after minimizing the copula via rotation B = A the distance between parametric copula and independent marginals. Since A is invertible, the KL divergence is invariant; maximization of the model likelihood – under independence – is equivalent to minimizing equation (13), below.

(13)

This is the same as maximizing the score, equation (14) ∂L ∂ =− K(q(·), qˆ(·, B)) ∂B ∂B

(14)

via the marginal distributions ∂L ∂ =− K( u, u) ∂B ∂B

and the marginal fit term as minΘ [CΘ (u) − ∏ (ui )].

∂H(G(y)) ∂ = (−K(G * (y), G(y))) ∂A ∂A

(15)

using the copula model. The estimates for B are yielded by partial derivatives, or score maximization ∂L / ∂B --- either through gradient descent or analytically. See Figure 3. The first row are the source distributions, all non-normally distributed: S1 ~ (U (−1, 1))2 ,

S2 ~ Gumbel(0, 1) , S3 ~ χ 2 . The second row are the `data’ observed after a full rank rotation. The third row are the outputs - estimated sources. The

81


data are plotted in dark gray; estimated density is superimposed in blue.(b) Log Mean Integrated Squared Error (MISE) of fastICA (see hyvarinen 1999) and CICA model applied to mixed Gaussian and Laplacian sources (via Gumbel-Hougard copula) - S1 and S 2 above. The MISE is N

n−1 ∑ (q( yn ) − qˆn ( yn ))2 as N ranges from 10 n=1

to 10000. MISE for CICA is in blue, fastICA is in red. The y − axis is plotted on log scale to highlight the difference: the distance between the two curves is on the order O(n−1/5 ) . The CICA procedure has a marginally better error rate, and less variability over (100) random draws at each sample size. The mean MISE curves are plotted in darker color.

Unification of PCA/ICA via the Gaussian Copula CICA, or ICA via the copula, yields a unifying framework in which PCA procedures can be cast. In the particular case of elliptical dependence we can write the density of the copula as 1 dCΘ (u) = φ( uT Σ−1u) = φ(t ) 2

(16)

with Θ = Σ the ‘scatter’ matrix for multivariate x k , and where φ(T ) ~ o(t 2 ) . The Gaussian copula is a member of this family. In the full CICA procedure we minimize the expected log of the above via equation (11) for any copula expressed ‘dependency gradient’. It is direct to note that the PCA program is a special case—the copula density matches the above, i.e. is Gaussian or elliptical—where the marginal mismatch (equation (9)) is ignored. Alternately, note that PCA via singular value decomposition (SVD) is a quadratic optimization, consonant with the expression of the elliptical copula density.

82

CICA then, via the Gaussian copula, is a generalization of PCA type procedures where Θ is a more general non-linear space or `dependency gradient’. Lastly, note under ordinary ICA—any transform of the margins is arbitrary and identifying the contrast gradient from the entropy is difficult. In CICA, via equation (9), the second term on the RHS is identifiable from the first term—allowing for Gaussianity in the sources. The advantages of this approach over nonparametric component analysis models are: 1. Flexible choice of non-linear transformations u. 2. Superior convergence of parametric estimators and stability of parametric estimators on small datasets. 3. Specification, ‘tuneability’ and interpretability of dependency. The main drawback of this method, especially on high dimension data, is the computational difficulty of the score maximization, equations (13) through (15). This full algorithm requires a non-linear optimization procedure on the full dimension of the data simultaneously.

The CICA Algorithm: Partite Model, Determinants of the ESI Essentially, the full method is simultaneously minimizing the mutual information and marginal fits. In the fully parameterized setting, the joint entropy of the outputs is H(u) =

k

∑ H(u ) − I(u) i =1

(17)

i

and the full method is equivalent to the maximik

zation of the above equation. Notice that ∑ H(ui ) i =1

is maximized when the ui are uniform - when the


hypothesized marginal distributions for the components are well `fit’. I(u) is minimized when the components are independent. An alternate, though philosophically consonant, approach is to:

2. E s t i m a t e u n i v a r i a t e d i s t r i b u t i o n s ui = Fî n (Wi x) , v j = Fˆjn (Wi x) via the em-

1. Still exploit the empirical distribution, setting ui = Fî n ( xi ) , treating the univariate marginals as observed or unparameterized, but… Fit copulas pairwise, say, and minimize I(u) by diagonalization of a mutual information matrix

4. The bivariate mutual information, or, E(log(dC(ui , v j ))) are the elements of the

pirical CDF. 3. Choose copula families at each bivariate pair: C(u) = ηθ ,θ (η−θ 1,θ (u) + η−θ 1,θ (v)) . 1

2

1

2

1

`scatter’ matrix. 5. C o n s t r u c t ` s c a t t e r ’ ΓC = ((Cθ (ui , u j )))i, j =1..k

2

matrix

ij

Θ

6. Compute SVD of ΓC , λ1,..., λ k Θ

MIΘ ( X i , X j ) = ((dCθ (u)log(dCθ (u))]) = ((MI θij )) ij

ij

7. Yield yk = bk x k = rk wk xk with yi ⊥ y j , \: ∀i, j via CΘ

(18)

This approach permits dependencies that may be restricted or inaccessible in many multivariate copulas, where the index sets for the dependence parameters must be hierarchical or nested (see Joe 1997, Simon 1986). As well, the number of families of bivariate copula is much larger than the those for multivariate copula – as many bivariate copula cannot be extended into greater dimensions [Joe 1997]. Partite copula estimation, in this manner via bivariate pairs, models the k-independent marginal dependence without the restrictions inherent in k-independent full joint models, with the sacrifice that I(u) not estimated beyond the second order. Set y = RWx , with W a `whitening’ matrix - the PCA transformation - and R the ICA transformation. This allows diagonalization of the final mutual information matrix via ordinary, quick, Singular Value Decomposition (SVD). The partite algorithm is: 1. Compute Wx , the PCA output or whitened data.

When the bivariate copula are well fit: Cˆθ → MI (Cˆθ ) ≥ 0 f o r a l l i, j . T h u s ij

ij

R = ((MI (Cˆθ ))) is positive semi-definite, by ij

exchangeability and the Singular Value Decomposition of R yields an orthogonal basis, with respect to the mutual information. The partite approach permits copula model selection at each index in the partitioned index 64  set; we fit bivariate copula to the   pairs. The  2  candidate copulae at each pair are two-parameter extensions of Laplace type copulae, a subset of the Archimedean family for copulas (see Abayomi [2008a]). Two-parameter families have the advantage of allowing multiple types of dependence, including some non-monotone dependence. Archimedean copulas are exchangeable and have a direct generating function representation [Joe 1997]. These properties are attractive for this partite approach: we trade for model flexibility, in a sense, at each of the bivariate margins with a full model on the entire data. The exchangeability of the Archimedean family, with the nonnegativity of the (copula) mutual information,

83


Figure 4. Upper panels: Plots of first three PCA components. Each ui = Fî n ( xi ) ; the data as transformedby their empirical CDF’s. Copulas are estimated, separately, on each bivariate pair. Lower panel: 3D Plot of PCA1 vs. PCA2 vs. PCA3 ; the bivariate plots are the planes in the 3D plot. The appearance of extreme dependence in the bivariate plots - figures (a) and (b) especially, is a feature of the imputation procedure. Compare these with the bivariate diagnostic plots in Abayomi et al. [2008]

yields a positive semi definite mutual information matrix ΓC which can be orthogonalized via Θ

ordinary SVD methods. See Figure 5. In analogy with the covariance/correlation matrix in a PCA procedure, we use the mutual information matrix ΓC - estimated via the biΘ

variate copulae - as a representation of the multivariate scatter. In PCA the covariance for each bivariate is estimated via xT x ; in this version of CICA the mutual information for each bivariate is estimated via the copula density: n=142

∑ dC (u , u n=1

ˆθ

n i

n j

)log(dCˆθ (uin , u nj ))

(20)

where each ui = Fî n (wi xi ) is the order statistic of the `whitened’ data, W the `whitening’ matrix. ICA methods typically optimize the mutual in-

84

formation, negentropy (distance from Gaussianity), or high order sample moments (usually cumulant) via gradient descent or other iterative procedure. In this version of CICA we substitute the iterative optimization with SVD orthogonalization. Copulae at each pair are selected - separately - via maximum likelihood from bivariate twoparameter (Archimedian) Laplace families in Joe [1997]. Additionally, each copula model is rotated 0, 90, 180 or 270 degrees. The Scree plot in Figure 6 [Catell 1966] suggests that the majority of `variation’ (68 percent) - as approximated by the cumulative eigenvalues of the SVD – is explained at about seven components. This can be interpreted as an indicator that a majority of the variation – Gaussian as well as non-Gaussian, by the CICA procedure – in the ESI can be explained by a reduced amount of information.


Figure 5. Image plots of covariance and mutual information matrices of ESI data - both matrices scaled for comparison. Mutual information matrix calculated via copula on `whitened’ (PCA output) data. Darker color indicates greater covariance/mutual information. Image plot of MI illustrates remaining variation/information. Histogram of MI reveals the same – PCA alone ignores remaining non-Gaussian information. The MI matrix features high information about the diagonal; this is supported by the proximate listing of similar variables in the ESI data

Figure 6. Scree plot [Catell 1966]: The y-axis is λ i / ∑ λ i , where λ i the i th largest eigenvalue of the i

Singular Value Decomposition (SVD). The graph is an illustration of the `variation’ explained up to the i th component. The red line is the scree graph for PCA components on the ESI dataset; the blue line is for the CICA components. The area under each curve is the percentage of total ‘variation’ - then - at each component. Seven (7) components for the PCA and CICA graphs are, respectively, 57.6 and 68.3 of the total`variation’

85


Table 2. Variables listed in order of first CICA component loading – magnitude of absolute value – and subsequent order of loading in components 2 and 3. The first component is dominated by stressor linked to air and water quality Variable Name

Table 3. First component CICA loadings vs. PCA loadings for ESI. Air and water effluent, and treaty membership dominate the first component. Conversely, the first PCA component is less cohesive. The CICA loadings – the first order determinants of the ESI – suggest that the major drivers of sustainability are pollution (air and water) and capacity

Component 1

Component 2

Component 3

SO2

1

33

54

NO2

2

24

42

TSP

3

16

33

SO2

NUKE

ISO14

4

43

35

NO2

BODWAT

WATCAP

5

43

35

TSP

TFR

IUCN

6

23

25

ISO14

FSHCAT

CO2GDP

7

52

61

WATCAP

PESTHA

IUCN

WATSUP

CO2GDP

GRAFT

The factor loadings [Wherry1984] – the coefficient weights the CICA rotation assigns to the variables of the ESI – allude to the importance of air quality in the first independent component, at least, in concert with water quality, childhood mortality and level of economic subsidy. This is illustrated in the list of variables with the greatest loadings or coefficient weights, in table 2. The collection of traditional `stock’ and nontraditional `social capacity’ variables in the first three CICA components is interesting, especially so when contrasted with the loadings generated by PCA alone. The variables identified by the CICA method offer a more coherent illustration of the drivers of variation in the ESI; the divergence in the CICA factors from the PCA one is a proxy for the additional, non-Gaussian, information or variability in the ESI. This difference is due to the ability of the CICA algorithm to capture dependence information in the data beyond multivariate normality. Table 3 lists the CICA loadings vs. the PCA loadings for the first component.

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CICA

PCA

THE FUTURE FOR (ENVIRONMENTAL) INDEXING Any index is essentially a – linear or non-linear – collection of (almost always) non-independent variables for the purpose of projecting a multidimensional concept onto a univariate scale of comparison. The scale of comparison – the range of the index – though arbitrary, is completely determined by the scheme for index construction and the characteristics of the underlying data. A useful index must be thoughtfully constructed; consumers of the index, perhaps intuitively, typically focus on relative rankings rather than absolute score. This is certainly true for development indices – where relative performance can drive international aid. In a direct sense, the projection of the multivariate data onto the univariate scale is the definition of the index. When this projection is well known or easily predictable, the scheme for construction is straightforward: construct the index, i.e. weight the variables, to minimize a loss between the index and its predictable value.


In general, let the value of the index, for one of a collection of administrative units, i, be θ i .

Data arrive as X = ( X 1,..., X k ) ~ f X , a collection of ratings/scores with some multivariate, nonindependent, distribution f X . A full (linear) indexing scheme would yield: the scores for each unit; the explicit, perhaps endogenously determined weights; and confidence intervals for the index scores as well as the variable weights. That is: θi =

K

∑c X j =1

j

j

- the scores for each unit; the vec-

tor, cT the weighting scheme chosen for the index; confidence intervals for the scores, P(θi ∈ (Li , U i )) = 1 − α , a n d w e i g h t s , P(c j ∈ (li , ui )) = 1 − α .

Choosing the appropriate weighting scheme and generating confidence intervals for each scalar θ i are separable tasks. On the other hand, the confidence intervals are of course affected by the choice of weighting scheme, even when the weights themselves are arbitrary in the sense that they are subject to an exogenous constraint chosen by the indexers. Essentially this couples the task of definition and prediction for the indexer: assignment of the weights is the specification of the index, but the specification of the index as a proxy for measurable idea must influence the estimation of the weights. Disentangling these tasks is heuristically, computationally and theoretically non-trivial. The author, in upcoming work on an index designed to measure progress towards the United Nations Development Program Millenium Development Goals (UNDP-MDG), addresses the joint prediction and specification problem (UNDP 2009-2010, in progress).

CONCLUSION This chapter illustrates a generalization of Principal Component Analysis using copula families

of distributions. This method, Copula Based Component Analysis (CICA), an alternative to non-parametric Independent Component Analysis (ICA) procedures, offers demonstrably more descriptive results on an index of environmental sustainability – the 2002 Environmental Sustainability Index (ESI). The CICA method accesses non-Gaussian dependence via an information theoretic technique on the special case of linear mixing models, the component analysis family. This approach is a useful post hoc procedure for index construction: the goal in indexing is the, hopefully parsimonious, description of a multidimensional concept with a univariate value. Most useful indexes, perhaps ironically, are designed to measure concepts and quantities that are not predictable, have not yet been measured, and are undefined. Environmental sustainability is certainly of that type; humanitarian and social development goals are as well generally ill defined. The statistician’s role in these settings is substantial: it is perversely ironic to avoid exact elucidation of statistical assumptions and methodology when they are dictated by the broad context of the desired measurements. Environmental statisticians have a stake in making the broad concept of sustainability operational: by providing specific measures by which decision makers and the public can judge progress, researchers can justify increased focus.

ACKNOWLEDGMENT Kobi Abayomi thanks Lynne Butler, the Haverford College Mathematics Department, and the Consortium for Faculty Diversity. Kobi Abayomi also thanks Jim Berger, Dalene Stangl, the Statistical and Applied Mathematical Sciences Institute (SAMSI) and Duke University. This chapter was completed and revised in pre and post doctoral fellowships at Haverford and Duke/SAMSI.

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Stein, M. L. (2007). Seasonal variations in the spatial-temporal dependence of total column ozone. Environmetrics, 18, 16. doi:10.1002/ env.802 Tsai, J. C. C., Chen, V. C. P., Beck, M. B., & Chen, J. (2004). Stochastic dynamic programming formulation for a wastewater treatment decisionmaking framework. Annals of Operations Research. Special Issue on Applied Optimization Under Uncertainty, 13, 13. United Nations Development Program (UNDP). (2005). Human development report. Retrieved from http://hdr.undp.org/en/media/HDR06complete.pdf Wherry, R. J. (1984). Contributions to correlational analysis. Orlando, Fl: Academic Press. World Bank-SEDAC Report. (2005). Natural disaster hotspots: A global risk analysis. Technical report.

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KEY TERMS AND DEFINITIONS Copula: Distributions on probability integral transforms. Component Analysis: Orthogonal basis data mining procedure. Mutual Information: Special case of Kullback-Liebler divergence between independence and dependence. Kullback-Liebler Divergence: Probability metric distance. Environmental Index: Usually affine transformation of environmental data. Index: Usually affine transformation of multivariate vector to scalar quantity. Non-Gaussian: Non Normally distributed.

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Section 2

Green ICT for Sustainability

91

Chapter 5

Greener Data Centres in the Netherlands Theo Thiadens Fontys University of Applied Sciences, The Netherlands Marko Dorenbos Fontys University of Applied Sciences, The Netherlands Andries Kasper Fontys University of Applied Sciences, The Netherlands Anda Counoutte-Potman Open University, The Netherlands

ABSTRACT In this chapter, the current situation regarding green data centres in the Netherlands is mapped. The chapter successively goes through the entire chain of processes that are needed for arriving at greener data centres. The chapter starts with the legislators. It continues with the procurement of IT. It discusses the design of facilities required for a data centre and the ICT provisions as used by this data centre. It looks at the analysis of the degree of sustainability in data centres and the measures that need to be taken as a result of this. And it concludes by describing how ICT equipment could be recycled. The conclusion of this chapter is that in the year 2009, the norms in this field are not yet fully present; that by making use of these norms in procurement, buyers will be able to arrive at more sustainable ICT; that from the current situation, consolidation alone could without any problem, enable achievement of the long-term agreement between the Dutch ICT trade organization and the Dutch government, an agreement in which over a period of 25 years starting in 2005, 2% less energy should be used every year; that every data centre needs to map its energy consumption and sustainability systematically, and that in 2009, over 50% over the annually installed ICT equipment in the Netherlands is recycled. DOI: 10.4018/978-1-60960-531-5.ch005


Greener Data Centres in the Netherlands

INTRODUCTION Tebodin (2007) teaches that, in spite of fact that there was only a minimal increase in floor surface in data centres in the Netherlands over the period 2002-2006, the consumption of electricity by these centres increased by 74%. In 2008, this consumption of electricity was for a country like the Netherlands 628 GWhour/year. Seventy five percent of this electricity is consumed by the 70 largest data centres in this country. Furthermore, Tebodin (2007) states that in many organizations, between 50% and 70% of the organization’s entire consumption of electricity is used on ICT and its necessary facilities. Sustainability of ICT does not just concern the consumption of energy. It also regards the sustainability of the used equipment and facilities as used in data centres. Both the sustainable use of energy as well as working with sustainable materials in data centres are subjects in this chapter. In essence, this chapter consists of three parts. These parts discuss the following subjects: • •

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sustainable procurement in a data centre in conformity with legislation and norms sustainability of the facilities for a data centre and of the ICT provisions in a data centre; and finally steering towards a sustainable data centre by means of information and analysis.

The chapter starts with a brief introduction about the used concepts and ends with a step-bystep plan for arriving at a more sustainable data centre. The chapter is based on a study carried out amongst those involved in the sustainability of data centres in the Netherlands. Within the framework of this study, in depth interviews took place with legislators, people involved in granting subsidies, buyers, suppliers of facilities, data centre operators and sustainability analysts working for consultancy companies and people

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of recycling companies. The study took a year. In this year, six months were spent on literature research. Afterwards, 18 in-depth interviews took place and the results of these were processed.

DEFINITIONS Concepts: The Data Centre A data centre consists of rooms for performing various tasks. This means that a data centre may include rooms for (see figure 1 (Thiadens (2008), ADC (2006)): • • • • •

setting up storage and processing units operating the ICT facilities producing output on paper carrying out production planning performance of the tactical service processes and front office processes

The rooms of the data centres contain ICT hardware, cooling equipment and electrical facilities such as a UPS (Uninterruptible Power Supply). The server rooms are usually cooled and kept at a predetermined level of atmospheric humidity. Furthermore, the use of a UPS ensures that electric power is permanently available. The rooms where the hardware is located and the consoles are set up are often fitted with a raised floor and a lowered ceiling. Under the floor, there is space for cables and sensors for detecting fire and water. Fire detectors are also found in the space above the ceiling. The data centre is exclusively accessible to authorised persons. To this purpose, each room is provided with a system for access control and registration.

Sustainability in Data Centres Since the Brundtland report (1987), sustainability is defined as managing the earth and its natural resources in such a way that it meets the needs


Figure 1. The floor plan of a data centre (Thiadens, 2008)

of the present generation without compromising their ability for meeting the needs of future generations. This way, sustainability has two dimensions: place and time. The nineties of the previous century saw furthermore the advent of the concept of corporate responsibility or sustainable entrepreneurship. In doing so, the maintenance or increasing of three types of assets take central stage: economic, ecological and social assets. Economic assets are the returns of an enterprise. Ecological assets consist of natural resources such as minerals, woods, rivers and a clean environment. Social assets include both the wellbeing of the company’s own staff as well as the wellbeing of the employees working for suppliers. This concept is also known as ‘triple P’: Profit, Planet, People. Recent and future developments with regard to sustainability in data centres are the subject matter of this chapter. In doing so, this chapter takes the perspective of the processes that are involved when realising these sustainable data centres. These processes are trying to realise sustainability within ICT. This is different from sustainability by means of ICT. In case of sustainability by means of ICT, the ICT is used for working more sustainably. Sustainability in data centres is here defined as follows:

“Sustainable working in data centres means that these data centres use materials and energy in such a way that the environment is burdened as little as possible in the development, use and disposing of materials as well as in the use of utilities such as water, gas and electricity during the set-up, management and operations of ICT facilities.”

THE PROCESSES FOR ARRIVING AT MORE SUSTAINABLE DATA CENTRES AND THEIR POSSIBILITIES The order of the processes, which are carried out for arriving at more sustainable data centres are shown in figure 2. These processes are: a. making laws and legislation. Regarding laws and legislation, one may on the one hand choose obligatory legislation or on the other hand decide on facilitating legislation. Apart from making laws and legislation, a government may decide to enter into binding agreements with trade associations. An example of obligatory legislation is the prohibition on the use of particular materials. An example of facilitating, is granting subsidies for

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Figure 2. Processes and their influence on sustainability

particular investments. An example of an agreement, is coming to a long-term agreement about pushing back energy consumption, in consideration of which the government puts the obligation of checking organizations that commit to this, on how they comply with environmental legislation in a different way. b. the procurement of data centre facilities and ICT provisions. In the specifications of their procurement, buyers may include aspects of sustainability, such as the requirements for complying with specific norms, delivery of a specific performance for the company and so on. c. the supply of products and services in the field of data centres. Suppliers of products such as cooling and ICT can focus on making their hardware more sustainable and on

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supplying more sustainable resources such as paper and toners. They can manufacture products such that in principle, these can be used from cradle to cradle. d. the operation of data centres. In the set up and operation of their facilities, data centres can reckon with sustainability aspects. In addition to measures regarding procurement, this leads to measures in the field of energy consumption and measures with respect to so-called small sustainability. e. advice on energy-conserving data centres. Suppliers of services, such as advisers, advise data centres regarding measures to be taken and can include data collections in the field of sustainability in their recommendations. And the consulting organization itself can meet the norms in this field.


f.

recycling of materials from data centres. Recycling organizations receive the materials and ensure that these are optimally processed.

Figure 2. shows these processes. It is also indicated which intrinsic possibilities these processes have in order to ensure the realization of more sustainable data centres.

SET-UP OF THE STUDY Over the period 2008-2009, the knowledge circle sustainability of the Fontys University examined on the basis of the model in figure 2, how the different processes aimed to achieve sustainable data centres in the Netherlands are executed. For this study, one decided to use in-depth interviews. In these interviews, the study group used questions that were drawn up in advance. These interview questions were drawn up on the basis of a study of documents and literature. Per process, a set of interview questions was composed. Next, sixteen in-depth interviews took place. Each interview took about ninety minutes and was recorded on tape. For the following processes interviews took place: a. In the field of making laws, rules, norms and agreements, two government services were interviewed. One of these services was in charge of carrying out subsidy schemes. The other one took care of the realization of long-term agreements. Both services are part of SenterNovem. The legislator itself, being the European Union or the Dutch legislator was not interviewed. Information in this field was obtained as a by-product of these interviews and by means of studying websites and literature. b. With regard to the procuring of facilities and ICT provisions, three interviews took

place: one at a local government, the city of Amsterdam, one at the Dutch tax authorities and one at the Fontys University of Applied Sciences. c. The supply of facilities and ICT provisions. Regarding supply of cooling equipment one single interview took place, namely with the Stulz company. Regarding supply of ICT hardware, HP was interviewed. d. Operations of data centres. In this sector, seven interviews took place. The following companies/bodies were interviewed: internet service provider Byte, the City of Amsterdam, the Kadaster (Dutch Land Registry), the Telecity hosting service, the Rabo Bank, the ICT department of the Fontys University of Applied Sciences and the police in the Rotterdam Region. e. Consulting about sustainable data centres. Regarding consulting, IBM was interviewed. In addition, the Gartner consultancy organization gave a lecture on how they perform sustainability audits in organizations. f. Recycling. One company, L&R Recycling, a recycling company, was interviewed. With the exception of the interviews with internet service provider Byte and hosting service provider Telecity, all interviews were held at organizations that employ over 1000 staff in the Netherlands. Some of the interviewed organizations, such as Senter Novem and L&R Recycling hold a clear position in their field. Others, such as the City of Amsterdam, Gartner, IBM and the Rabo Bank are nationally known for being trendsetters in the field of sustainability or of sustainable data centres or regarding consultancy on sustainable data centres. This way, the choice of organizations includes a bias. One mainly selected organizations that have already earned their spurs in this field to a certain degree.

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Figure 3: Rules, norms, codes, agreements and subsidy schemes

THE RESULTS OF THE STUDY Making of Laws, Rules and Norms In the study an overview was achieved about the rules, norms, codes, agreements and subsidy schemes regarding sustainability. This overview is shown in figure 3. Figure 3 shows that generally speaking, legislation for sustainability is made at European Union level. Subsequently, European legislation is either immediately effective in the countries of the European Union or is translated into legislation in each of the countries of the European Union. Business may be granted a specific amount of respite for meeting the demands of this legislation. Therefore, one supplier remarks that in the year

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2009, the impact of this legislation is still in its infancy. European legislation seems to focus particularly on the handling of materials. With regard to energy savings, the European Union seems to rely predominantly on a code of conduct. In 2008, the European Commission released the Code of Conduct on Data centres Energy Efficiency. The European Union is of the opinion that by measuring and monitoring their own energy consumption, organizations will start to think twice about this energy consumption and will amend this. Large organizations such as Telecity and the Rabo Bank have signed this code and regularly report their energy consumption in conformity with the guidelines of the Code.


With regard to standards, such as the Energy Star Label for sustainable procurement, which in the Netherlands has been translated by Senter Novem into a Dutch norm, one may establish that these do as yet not cover the entire field of the facilities for data centres and the ICT provisions needed for these. These standards mainly concentrate on workstations. Moreover, within the European Union, governments can come to long-term agreements on the use of energy and promote the economic consumption of energy by means of subsidies. In the Netherlands for example, long-term agreements for pushing back energy consumption were made with the ICT sector. The ICT Office trade organization, representing all ICT supply and consultancy organizations, agreed with the State Secretary for Economic Affairs that ICT companies will make an effort to improve their energy efficiency by 2 percent per year. By arranging these long-term agreements businesses, sector organizations and governments take on commitments with each other. Businesses commit themselves to drawing up an energy efficiency plan, to use 2% less energy per year and monitor their energy consumption. The sector organization draws up a long-term plan and together with its members carries out a strategic sector study. This provides a route map for energy savings in the period up to the year 2030. The central government commits itself to the pursuit of an active policy aimed on promoting possible plans. This may for instance involve creation of subsidy schemes. Local governments focus their enactment for upholding environmental legislation at organizations that do not participate in the long-term agreement. Private organizations ultimately can use subsidy schemes. In the year 2009, the most important subsidy regulation in the Netherlands proves to be a regulation regarding tax deduction for energy investment. In 2007, this regulation was used sixty times by ICT service providers. This use concentrated on the cooling of data centre facilities. With regard to the other regula-

tions, organizations often need the assistance of a specialised consultancy agency.

Procurement and the Organization of Procurement Procurement of Buildings and Energy Regarding procurement in the Netherlands, one needs to distinguish between the procurement of buildings and energy and the procurement of facilities and ICT provisions. In the procurement of buildings and energy, one firstly makes a distinction between purchasing buildings, cooling equipment and energy and secondly, between organizations of the central government and of other organizations. In the case of data centre buildings for the central government, a specific package of demands is drawn up, based on the processes that take place within a specific building. The strategy of the Dutch government focuses on more sustainable construction. This often involves public-private cooperation. The general and technical services for a building for example, are determined for a period of twenty years. And the government closes a contract to hire the building with the agreed services for this period. Energy for central government buildings is purchased collectively. In this case, the every government authority involved can choose to use grey or green electricity. Green electricity is electricity produced in a sustainable way using for example wind turbines or water turbines. The Dutch Tax Authorities, that is part of central government, use for example only green electricity. The electricity consumption of this service with its 35,000 employees is about 70 million kilowatthours per annum. The interviewed local council of Amsterdam also used green energy for its electricity. This energy is purchased on the basis of a framework contract. At Fontys Universities, the ICT department draws up the demands for housing, energy

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and cooling. Next, this is purchased by their procurement department. The department responsible for housing monitors the measurements of energy consumption. In the interview on the procurement of buildings, cooling and energy, the buyers of the City of Amsterdam and those of the Fontys Universities remark that in their case, there is consolidation of many small data centres into one single big one with an emergency fallback data centre. This concentration of facilities results in considerably less energy consumption. In this consolidation, one also investigates better use of storage and processing capacity. This way, consolidation of ICT provisions has more impact than the replacement of old ICT hardware by entirely new. Furthermore, the buyer of the Fontys University of Applied Sciences remarks that in 2009 the procurement of housing and energy is separated from the procurement of ICT provisions.

Supply of Cooling Facilities, ICT and Other Materials Apart from suppliers of buildings and of energy, data centres use suppliers for cooling equipment, ICT hardware and for resources such as toners and paper. With regard to cooling equipment, suppliers need to be able to supply equipment that is capable of switching off individual parts automatically or to switch to cooling by means of outside air. The parts of a cooling installation that demand the most energy are the compressors, the ventilators and the pumps. When less cooling is required, the compressors will be switched off first, whilst the pumps and ventilators continue to function. At even lower temperatures, the ventilators will also run slower. Cooling units are explicitly referred to in the plural because cooling facilities have to be modular whenever possible. This allows for addition and reduction of cooling capacity in increments. This also means that compressors, pumps and ventilators hardly ever need to operate at full

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capacity, which saves energy. If furthermore, the temperature of the outside air is sufficiently low, then it should be possible to just use outside air for cooling. During the study it was established that in the Netherlands with its average temperature of 11° Celsius only the larger data centres use cooling by means of outside air and make use of a modular set-up of the cooling installation. Furthermore, new methods for cooling are often not discussed until a new data centre is started. The same as for cooling equipment goes for the modular set-up of uninterruptible power supplies (UPS). A UPS should be set up modular, thus enabling adjustment of the UPS capacity according to the situation. This because the UPS capacity is not used to its full potential in many organizations. For suppliers of ICT provisions, the sustainability aspect turns up as soon as customers decide to renew their hardware and when they need to comply with legislation. It appears that the interviewed customers proceed to purchase more sustainable hardware when the economic lifespan of their old hardware has expired and not before. In that case, sustainability is one of the criteria at acquisition. Moreover, at acquisition suppliers often have to guarantee that they will take care of environmentally friendly disposal of the purchased hardware or resources. With regard to actual the procurement contracts of ICT provisions, the study is limited to the purchase of workstations. In the organizations as studied, one only discovered specifications regarding the purchase of workstations, in which the requirements were formulated from the perspective of sustainability. Two recent requests for bits were examined in more detail. These concerned framework contracts for the purchase of hundreds of workstations. In studying these requests for a quotation, it emerged that governments copy their sustainability criteria from the Energy Star Label or from norms that have been derived from this. The examined organizations remarked that all A-


brands for workstations comply with the norms of the Energy Star Label and so compliance to this norm is not really a distinguishing criterion. Therefore, government organizations often take things a step further. The Fontys University and the City of Amsterdam usually ask the supplying organization questions such as: • •

what would you advise with regard to the sustainability of the workstation? which social return could you offer our organization (e.g. work placements, employment, education opportunities)

Next, these organizations include the answers to these questions in a ratio, which is indicated in advance in their decision making. Both the City of Amsterdam, as well as the Fontys University of Applied Sciences indicates that in 2009, price/ performance ratios are given priority over sustainability. Besides, they state it is impossible to include in the assessment of quotations, whether a product or service is realized in a socially responsible manner. The reason is that European procurement criteria, which governments legally have to use, prohibit inclusion of the manufacturing method in the buying decision.

Organizing Procurement for using it as a Strategy Tool Counotte (2009) remarks that in order to achieve that procurement of provisions is used as a tool for operating more sustainably; there should be a clear strategy from the top of the organization. In that case there has to be: • • •

a strategic interest in choosing sustainability sufficient internal expertise available within the organization a certain openness in the organization regarding external contributions;

•

clear participation of employees, who also view sustainability as a normal component of operational management.

Should one next examine whether organizations are set up for giving the sustainability aspect attention when procuring, one then has to discuss the set-up of the organization, the reportage on the progress of the procurement strategy regarding sustainability and the way one cooperates with third parties. In our research, the support for sustainability from the top in each of the studied organizations was investigated. The City of Amsterdam and the Dutch Tax Authorities both have policy plans in this field. At the municipality and the Rabo Bank, the organization is clearly set up to give attention to sustainability. The topic is dealt with starting from the top of both organisations. At every level of the organization, managers pay attention to sustainability topics and have to comply with key performance indicators. At the municipality, procurement regarding ICT is taken care of by a team consisting of staff of the ICT department, the environmental department and the procurement department. The Rabo Bank has a corporate social responsibility directorate, which directly reports to the Executive Board. Furthermore, each part of this bank has to periodically report on energy consumption. However, in many organizations, the organization surrounding sustainability is still in its infancy. The Tax Authorities have a policy advisor who has sustainability in his portfolio. Internal reportage on the sustainability aspect is sub optimal in most of the studied organizations. Collaboration between organizations regarding sustainability as it turns out, is slowly starting to gain speed. In this, the central government is ahead of the other authorities and the latter in turn are ahead of the educational institutes.

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Operating a Data Centre The Situation Within the framework of this study, three types of data centre operators were interviewed. These are organizations with in-house data centres such as the Fontys University of Applied Sciences, the City of Amsterdam and the Rabo Bank; organizations that have placed their ICT provisions in a computer room that is managed by a third party, such as the Kadaster and internet service provider Byte; and organizations that manage these computer rooms, such as the Telecity Group. With the latter, the Dutch government came to an agreement at sector level in 2008. This agreement is known as the MeerJaren-Afspraak energie-efficiëntie (Long-term agreement on energy efficiency in the Netherlands) (MJA) for the ICT sector. In long-term agreements like this, businesses, ministries, sector organizations as well as provinces and municipalities enter into obligations with each other. Apart from long-term agreements, data centres have to deal with Codes of conduct, which originate from the European Union. Since 2008, there is the Code of Conduct on Data Centres Energy Efficiency. The idea behind this Code of Conduct is that organizations by measuring and monitoring their own energy consumption in detail will start to reflect on this energy consumption and adjust it.

Generic Measures for Arriving at a Larger Degree of Sustainability According to Rasmussen (2006) and Van de Graaf (2009), the demands on reduction of energy consumption and arriving at the use of more sustainable materials can be achieved by operators of data centres by taking the following measures: 1. Measures with regard to cooling. This includes the use of free cooling and the po-

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2.

3.

4.

5.

6.

sitioning of cooling equipment in the room at the data centres Consolidation and virtualisation of ICT provisions. This leads to a concentration of facilities in a limited number of locations, concentration of applications on a limited number of servers and concentration of data storage. Optimisation of the lay-out of the data centres. This includes an optimum position of the hardware, an optimum flow of warm and cold air through the centres, optimum positioning of the tiles with openings in the computer floor, inclusion of hot and cold corridors when placing racks with ICT equipment etc. Improvement of the cabling and the electricity supply. This includes the use of new UPS equipment, separation of power and data cabling, installation using flexible and coverable cable channels. Replacement of older equipment, depending on the depreciation period. Energy savings through using LCD screens and blade servers for example. Introduction of the small sustainability such as working with lights off, switching off equipment automatically, remote operation of data centres.

Figure 4 shows the effects of possible measures on energy consumption. This does not take into account that manufacturing of devices such as for example LCD screens, which consume little energy when used, do cost more energy in the manufacturing process as compared to oldfashioned cathode-ray tubes. Apart from taking these measures, the choice of location for a data centre is important from a sustainability perspective. The use of free cooling for instance, requires a low outside temperature. Being able to reuse heat demands that centres are positioned in an area where one is able to reuse this heat, such as for example in market gardening businesses.


Figure 4. Six possibilities for arriving at a more sustainable data centres

Apart from taking these measures, the choice of location for a data centre is important from a sustainability perspective. The use of free cooling for instance requires a low outside temperature. Being able to reuse heat demands that centres are positioned in an area where one is able to reuse this heat, such as for example in market gardening businesses. In the construction of sustainable data centres, data centre operators may utilize standards. Currently, the TIA-942 standard is operational. The standard norm NEN 381888 is under development. The TIA standard deals with the lay-out of the data centres, its cabling, the degree of availability of the data centres as pursued and the environmental considerations that need to be included in the design. The latter considerations concern the mode of fire protection and the materials used in this, the humidity levels in the centres and the specifications for electricity and cooling. Some of the requirements to data centres are subject to the desired availability of the ICT provisions. This desired availability is expressed by means of a tier classification. Better availability often leads to deployment of more hardware. And extra

hardware means extra cooling equipment, extra materials etc. A demand for 99.995% availability leads to an N+N demand with regard to hardware. This means that for every device, exactly the same device is on standby. At N+1 (99.982% availability) there is at least one device on standby for every type of device.

Daily Practice at the Five Studied Data Centres Major Actions in the Field of Sustainability Figures 5 and 6 show which of the measures, as stated in figure 4 are implemented in Dutch practice. The figures are limited to the most important measures. Figure 5 mainly focuses on measures that involve location, the use of outside air, the use of energy measurements and aspects of data centres layout. Figure 6 describes the concentration of ICT equipment, their consolidation and the use of new ICT equipment in these data centres. Figure 5 and 6 demonstrate that in 2009, the concentration of facilities is often given priority in the five organizations that were studied. Both the Rabo Bank as well as the City of Amsterdam

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Figure 5. Location, concentration of and layout at the studied data centres

Figure 6. Consolidation, virtualisation and new hardware

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is trying to consolidate hundreds of data centres into a few large ones. Figure 5 learns that for computer hosting organizations and their customers, the measuring of energy consumption is a matter of course. Computer hosting organizations such as Telecity and KPN Getronics are charging the use of floor space and energy consumption separately. If necessary, the energy consumption can be specified for each device. Under normal circumstances, demands to the availability of facilities, result in at least one device of the same type as the device in use being on standby (figure 5). The answers are variable, when asked about the location of hardware based on energy consumption. With regard to this, it is noticeable that the use of hot and cold corridors as well as the covering of cable channels is often omitted (figure 5). Figure 6 deals with the ICT equipment themselves. Figure 6 shows that in 2009, consolidation and virtualisation of ICT provisions is the done thing. This consolidation and virtualisation is often goes hand in hand with the standardization of applications and infrastructure. The consolidation process runs parallel with concentration towards a smaller number of data centres. In the Netherlands, this process has been started in the last few years. Virtualisation for the benefit of servers and storage capacity runs parallel to this. In general, renewal of hardware does not take place until an entirely new data centre is installed or when the depreciation period finishes. From the interviews, it transpired that when purchasing new hardware, the costs are often the clinching argument. More modern hardware so it appears, is not considered until the economic lifespan of the hardware has expired. New cooling methods are especially discussed when a new data centre is started. Closer examination of figure 6 confirms that the use of new hardware that uses less energy is given little attention. The deployment of blade servers has only recently and gradually become something worth considering.

The last and certainly not least important point concerns small sustainability (figure 8). This small sustainability is encountered at workstation level across the entire organization. In various locations in data centres, one has to deal with ICT hardware such as telephones, personal computers (PCs), notebooks and printers. In every organization that was studied, the cathode ray tubes have by now been replaced by more energy friendly liquid crystal displays (LCD’s). In a number of organizations double sided printing and compulsory use of the departmental printer has been introduced. At Rabo Bank, the reuse of notebooks and mobile phones is standard. This bank has a separate organization unit that enables this reuse. It also turns out that employees are increasingly more aware of the effect that the use of ICT has on the environment, even if this is sometimes just because of the frequent awareness campaigns as seen on television and as well as within the organization. Users of ICT can play their role by having a careful attitude with regard to the use of energy and attention for use of materials that can be recycled. In many organizations, lights out data centres are used. These data centres are remote controlled. They are cooled down to a suitable selected temperature, which is not too low (see figure 7).

Consulting about Sustainability of Data Centres When advising on sustainability, the study is aimed at the availability of indicators and measurement data and at the use of measurement data in the advice. Next, we will discuss the availability of indicators as well as the use of measurement data as stored in a database in advising on sustainability.

Indicators and Key Performance Indicators Used The indicators as used by consultants when making visible sustainable energy consumption and use

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Figure 7. Small sustainability in data centres

Figure 8. Subjects when investigating the sustainability aspects of a data centre

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of materials already partly exist. These indicators mainly refer to the way in which an organization deals with energy. At data centre level, one uses the PUE as a standard. PUE stands for Power Usage Effectiveness. The PUE is equal to the entire energy consumption of a data centre divided by the energy consumption of ICT hardware. This PUE is a standard that was developed by the Green Grid, an organization of ICT professionals. The Green Grid (Belady, 2008) remarks that there is no overall view of PUEs for all data centres. Furthermore, measurements by the Lawrence Berkeley National Laboratory (Belady, 2008) in 22 data centres provide PUE values of between 1.3 and 3.0. These values were also found in the study. However, the main conclusion of the Dutch study is that the availability of measurements and therefore indicators does differ per organization. In this field, the studied bank was an example. At the bank’s data centres, the used energy was measured at every level: at the device, at the rack, at the housing, at the main distributor and at the energy provider. The data centres of the Rotterdam police did not have this data and confirmed this when it asked for external advice on how to make their data centres more sustainable. When using hosting companies, it is the customer who decides at which level they receive data on their energy consumption. The hosting companies that were researched make for each of their customers their own power distribution unit (PDU) available and the hosting company reports on the consumption per appliance, provided that this is connected to a separate PDU connector. The customers are responsible for the connections. Furthermore, reuse of materials is an important aspect of corporate sustainability. At organizational level, it is often not exactly known what percentage of the procured ICT materials is recycled. Forerunners such as the Rabo Bank have entirely organized reuse or disposal of ICT equipment and supplies themselves.

Advice Based on Measuring Data and Use of a Central Database Starting Points for Advising Advice on sustainability may take place on the basis of a global analysis or on the basis of a more specific one. A global analysis investigates the strategy regarding sustainable ICT and its execution for the entire organization. The results of this investigation are compared with the results of a similar investigation in comparable organizations. Gartner’s (Kistner, 2008) advice is an example of a global analysis. Gartner developed this global analysis in cooperation with five large organizations in Great Britain. After each interview, the answers as given by an organization are stored in a database. This database includes data of all the organizations worldwide that have participated in this type of Gartner study. By the end of 2008, this database included the data of around 125 large organizations. These organizations employ between 2,000 and 300,000 people. During the interview with the Kadaster and the Rabo Bank it transpired that in their efforts for working more sustainably, they are supported by Gartner. With regard to this, the Kadaster was still at the start of the study and the Rabo Bank had clearly been involved in this for several years. Therefore, subjects such as lifecycle management, replacement strategy, and sustainable procurement came up structurally in the interview with the Rabo Bank. A more specific analysis goes into the sustainability of a particular part of the organization, such as a data centre. IBM’s advice (van der Graaf, 2009) on sustainable data centres is an example of this. This type of advice is discussed in more detail below. In both types of advice, employees of the organization as well as the consultancy agency are teamed up. They collect the data, analyze this and compare this to the data provided by other organizations, which is stored in their database. Finally, they report their findings to their client.

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Investigation of the Data Centres The more specific analysis of a data centre (Van der Graaf, 2009) concerns four parts. These are: 1. investigation of the data centre by its management; 2. the making of an inventory and analysis of applications and dealing with data; 3. the making of an inventory and analysis of ICT provisions such as servers and storage media; 4. the making of an inventory and analysis of facilities such as electricity and cooling Figure 8 gives a global outline of the four parts. The investigation roughly takes place according to the step-by-step plan as described below: 1. During a preparation phase, the customer is asked to collect a limited number of data on their own data centres. This provides them with a fairly clear idea of the position of their organization. This also creates a basis for further research. 2. The team is created. This team is chaired by someone of the investigated organization. It consists of representatives of the data centres and employees of the advisory organization. The team reports to the steering committee. Next, the team meets, discusses the data collected during the orientation phase, decides what the next steps should be and what data needs to be collected. 3. The team collects the required data. For this, specialists in the field of housing and IT are questioned. This step also includes a visit to the investigated data centres. 4. After having been checked and possibly added to, the collected data is analyzed. Next, the analysis is put into a report; this is discussed by the team and if necessary amended. 5. Finally, this report is presented to the client.

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In the Netherlands, the abovementioned investigation usually takes place for data centres of between 50 and 1000 square metres in size. Van der Graaf (2009) states that analysis often shows that it is possible to save between 30 and 70% in energy costs. If consolidation and/or virtualisation means a change from five servers to one single large server, one is able to save 60% in power consumption

Recycling of ICT Cooling Facilities and ICT Provisions Suppliers are often required to take care for disposal of their products. Suppliers take care of this by concluding contracts with recycling companies. In reality, this involves the disposal of hardware such as servers, laptops, monitors, keyboards and computer mice or parts thereof such as cables or resources such as toners and cartridges. At disposal, the hardware and resources are collected and these will ultimately end up with recycling companies. In these companies, these objects are disassembled. Monitors for example are dismantled and separated into plastic parts, electronics, cathode-ray tubes and wiring. These parts are sold on or further processed by specialist companies. One organization for example is specialised in the processing of the cathode-ray tubes and another organization in recovering precious metals. Every year, 45 million kilos of ICT hardware is introduced to the Dutch market. Over twenty million kilos of this is recycled via the ICT-Milieu (ICT Environment) foundation, which is part of ICT Office, the sector organization for ICT. Three hundred members of this sector organization participate in its ICT collection system. To get an impression of the amount of ICT equipment recycled in a municipality as Amsterdam or in a large bank as Rabo one has to count with 10003000 pieces of equipment every year. It is not known, what is done with the other 25 million kilos.


THE STATUS OF THE PROCESSES TO ACHIEVE MORE SUSTAINABLE DATA CENTERS In the above, five processes to achieve more sustainable data centres have been examined. These processes were legislation and subsidizing, procurement, operating data centres, consulting and recycling. It was established that in the Netherlands: a. legislation regarding sustainability of materials predominantly originates from the European Union. Furthermore, it became clear that governments mainly attempt to realize energy economies by means of codes of conduct, long-term agreements and by subsidizing facilities. With regard to this, it has to be concluded that the use of subsidies mainly focuses on whether the investment is tax deductible and that in 2008, this use is limited to 60 subsidy applications per annum, mainly for cooling equipment. b. when procuring facilities for data centres, buyers formulate demands from a sustainability perspective in their request for a quotation for workstations. As far as buyers of authorities are concerned, these demands go further and they ask questions about the contribution of a supplier to the government’s organisations primary process. When supplying cooling facilities and ICT provisions the suppliers should have products that do meet the current and future requirements with regard to sustainability. Supplier of cooling and UPS should make these modularly connectable. Furthermore, the suppliers of cooling should be able to provide cooling units that use outside air (free cooling). Sup-pliers of ICT provisions could gain from giving more attention to the environmental aspect of equipment and materials like toners. This will make it cheaper for them to guarantee recycling.

c. Operations of data centres can be distinguished into two types. The first type consists of data centre operators that are part of a larger organization. The second type consists of computer hosting companies. In 2009, operators of in-house data centres are involved in concentration, consolidation and virtualisation of their ICT provisions. They often do not procure new hardware until the old hardware has depreciated. Furthermore, these operators do not always measure their energy consumption in enough detail. When designing new data centres, sustainability may play a part. Computer hosting companies charge both for used computer surface as well as used electricity at any required level. If required, they will to be able to advise their customers on the implementations with regard to the energy consumption of their hardware. d. in 2009, advisors in the field of sustainability such as Gartner and IBM are building a database with data regarding sustainability together with their customers. On the basis of this data, advice is given. In that case, it is always questionable what quality the data in this database is. Looking at how these processes are executed one can conclude that there are still clearly underexposed aspects with regard to data centres. Legislation, directives and norms do not fully cover the area in question. With regard to procurement for example, the only available norms are the ones regarding workstations and sustainability is also an item that often does not really count that much. In data centres, detailed measurement of energy further on is often insufficient. One has to conclude that sustainability in data centres seems to be at its early stages of development in the Netherlands. Consolidation of data centres is still going on and enables organisations to save large amounts of energy. Measurement of energy consumption is not generally applied. Few

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Figure 9. Government and information in a “green” data centre

organizations have, as indeed the Rabo Bank and the City of Amsterdam have done, given a place to sustainability in their organizational structure from top to bottom. This means that the situation as shown in figure 9, in which a data centre organization governs on sustainability to its optimum extent, is not often present in the organizations within the Netherlands.

Brundtland. (1987). Brundtland-beginselen. In Environmental protection and sustainable development. Legal principles and recommendations (pp. 25-33). London, UK/ Dordrecht, The Netherlands/ Boston, MA: Graham & Trotman/ Martinus Nijhof.

REFERENCES

Europese Commissie. (2008). Code of conduct on data centres energy efficiency, version 1.0, 30 October. Brussels.

ADC. (2006). ANSI-TIA942, data centres standards overview. Minneapolis, MN: ADC Communications. Belady, C. (2008). Green grid data centres power effectiveness metrics: PUE en DCIE, The green grid. Retrieved from www.greengrid.com. Belastingdienst. (2006). Actieprogramma duurzame Belastingdienst, 2006-2010. Den Haag.

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Counotte-Potman, A. (2009). Organiseren voor duurzaamheid, interne notitie Open Universiteit. Zwolle.

Fontys Hogeschool, I. C. T. (2008). Bestek multifunctionele afdrukapparatuur. Eindhoven. Graaf, A. van der. (2008). Sleutel energiebesparing in ICT ligt bij datacentres. Energie, October. Graaf, A. van der. (2009). How green is your data center. Presentatie IBM seminar Montpellier.


Greenpeace. (2009). Guide to greener electronics. Retrieved from http://www.greenpeace.nl/ campaigns/giftige-stoffen-2/vervuiling-doorelektronica Kenniskring duurzaamheid rekencentra. (2009). Het groene rekencentrum van morgen. Eindhoven, The Netherlands: Fontys Publicatie. Kisters, H. (2008). Presentatie van de analyse van duurzaamheid van rekencentra. Eindhoven, The Netherlands: (Gartner), Fontys. NEN. (2008). NPR Computerruimtes en datacentres. Publicatie informatiedag 28/11/2008, NEN, Delft, informative. Office, I. C. T. (2009). Video film, meerjarenafspraak en ICT monitor 2008. Retrieved from www.ict-office.com Rasmussen, N. (2006). Implementing energy efficient data centres. White paper retrieved from www.apc.com Senter Novem. (2009). Criteria voor duurzaamheid bij inkoop. Retrieved from http://www.senternovem.nl/duurzaaminkopen/Criteria/index.asp Senter Novem. (2009). Energieaftrek jaarverslag 2008, energielijst 2009, Zwolle. Senter Novem. (2009). MJA3: Intensivering, verbreding en verlenging afspraken, (SenterNovem, publication number 2MJAF0803). Tebodin. (2007). ICT stroom door. Den Haag. Retrieved from www.nederlandict.nl/files/TER/ TEBODIN_rapport_energieverbruik.pdf Thiadens, T. J. G. (2008). Sturing en organisatie van ICT voorzieningen, 2nd ed. Zaltbommel, The Netherlands: van Haren Publishing.

Titulaer, R. (2008). Stulz airconditioning, presentatie, van der Valk, Eindhoven. Turner, W. P., et al. (2008). Tier classifications define site infrastructure. Uptime Institute White paper, Santa Fe.

KEY TERMS AND DEFINITIONS Data Centre: Is a facility used to house computer systems and associated components, such as telecommunications and storage systems. It generally includes redundant or backup power supplies, redundant data communications connections, environmental controls (e.g., air conditioning, fire suppression) and security devices. (Wikipedia, 2010) Procurement: The acquisition of appropriate goods and/or services at the best possible total cost of ownership to meet the needs of the purchaser in terms of quality and quantity, time, and location. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimising exposure to fraud and collusion. Procurement is distinguished from purchasing, as procuring of services and/or goods leads to a longer term relation between the customer and its supplier. (partly Wikipedia, 2010) Sustainability in Data Centres: Sustainable working in data centres means that these data centres use materials and energy in such a way that the environment is burdened as little as possible in the development, use and disposing of materials as well as in the use of utilities such as water, gas and electricity during the set-up, management and operations of ICT facilities.

Thiadens, T. J. G., & Counotte-Potman, A. D. (2009). Duurzaamheid van rekencentra. In Roos, J. (Ed.), Checklists voor Informatiemanagement. Deventer, The Netherlands: Kluwer.

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Chapter 6

Information Technology Resources Virtualization for Sustainable Development Malgorzata Pankowska University of Economics in Katowice, Poland

ABSTRACT Nowadays business organizations seem to be involved in the processes of sustainable development. Therefore, not only economic indicators of performance are considered but also – the environmental responsibility is equally important. The environmental responsibility covers social responsibility and natural environment responsibility. The last one demands taking into account promotion of sustainable use of renewable natural resources, reducing the emissions and wastages, and decrease of energy consumption. The first part of the chapter includes presentation of benefits resulting from IT (Information Technology) resources virtualization, Grid computing and cloud computing development. The second part contains a model of IT governance for sustainability. The main important factors included in the model concern IT strategy, business strategy, IT management, business agreements.

INTRODUCTION: GENERAL PERSPECTIVE OF VIRTUALIZATION Modern computer systems are now sufficiently powerful to present users with the illusion that one physical machine consists of multiple virtual DOI: 10.4018/978-1-60960-531-5.ch006

machines, each one running a separate and possibly different instance of an operating system. Today, virtualization can apply to a range of system layers, including hardware, operating system and high-level language virtual machines. Virtual machine concept was in existence since 1960 when it was first developed by IBM to provide concurrent, interactive access to a


Information Technology Resources Virtualization for Sustainable Development

mainframe computer (Cala & Zielinski, 2007). The fundamental idea behind virtualization is to introduce an additional layer of indirection in accessing resources so that a lower-level resource can be transparently mapped to multiple higher-level resources or vice versa. Each level has its own virtualization control layer which is responsible for management and enforcement of mapping between level n and n+1 of virtualized resources. So virtualization decision may be performed during the system configuration phase or even in the run-time. The lowest layer of the hierarchy represents physical resources. The virtualization of resources is a powerful tool for creating advanced data network services. A major advantage of the virtualization of network functionality through abstraction techniques is increased flexibility in service creation, provisioning and differentiation. The main purpose of the infrastructure-level virtualization is to provide an abstracted view of a collection of discrete computer, data, application, network and storage resources for the purpose of hiding complexity and improving flexibility and productivity. An important beginning to the virtualization process is to recognize that series of components could be better managed if they are abstracted. As these abstractions are crafted in an appropriate and ultimately productive manner, the predominant interactions remain with the individual components. In this way, virtualization also provides both an opportunity and the means to abstract away complexity. It offers customers the opportunity to build more efficient IT infrastructures. Virtualization is seen as a step on the road to utility computing. With virtualization, the logical functions of the server, storage and network elements are separated from their physical functions (e.g. processor, memory, controllers, disks and switches). In other words, all servers, storage and network devices can be aggregated into independent pools of resources. Elements from these pools can then be allocated, provisioned, and managed, manually or automatically, to meet the

changing needs and priorities of one’s business (Minoli, 2005).

BACKGROUND - INFORMATION TECHNOLOGY INFRASTRUCTURE VIRTUALIZATION Virtualization is a broad term encompassing a set of several deployment and management features and could be defined as a technique used to abstract the physical characteristics of the resources of a system from other systems, applications or users interacting with those resources (IBM, 2008). The virtualization can make a single physical resource appear to be multiple logical resources, or multiple physical resources appear to be a single logical resource. Virtualization is viewed as: •

•

•

•

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File virtualization: multiple files aggregated into a large file, presents integrated file interface, Software virtualization: enabling users to use more-efficient, high-performance hardware to support hundreds of applications and several operating systems in a single system. Applications are used in data path, or in “plug-and-play” way from host view, Desktop virtualization: providing the access from anywhere for convenience and to ensure business continuity and disaster recovery, Workstation virtualization: enabling the centralized control of data and the efficient administration of them among multiple users in different locations, Storage virtualization: enabling users to centralize data storage to protect data, improve security and disaster recovery, and accelerate data backups, while desktop virtualization enables moving of data, applications, and processing away from desktop

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PCs onto secure, cost-efficient virtualized network resources, replacing PCs with virtualized thin-client computers (Moore, 2006). Storage virtualization automates tedious and extremely time-consuming storage administration tasks. This means the storage administrator can perform the tasks of backup, archiving, and recovery more easily and in less time. Storage virtualization is commonly used in file systems, storage area networks (SANs), switches and virtual tape systems. Users can implement storage virtualization with software, hybrid hardware or software appliances. Storage virtualization provides many advantages. It is the pooling of multiple physical storage resources into single storage resource that is centrally managed. So it is a way to reduce complexity of resources management. The second advantage is that it automates many time-consuming tasks. Considering the scarcity of trained storage personnel, this advantage becomes increasingly important as IT business grows. Third, the storage virtualization can be used to hide the overall complexity of IT infrastructure. Server virtualization can help to provide standard enterprise environment across the organizations desktops. Virtual servers combine deployment software with preconfigured deployment, making it easier to introduce new services and applications, faster and easier than if they are rolled out conventionally. It is possible to move legacy systems from an old server to a new server, which will consume less energy and help to save costs. While ideally it seems that having one virtualized server will reduce both energy and hardware costs, one should be cautious in consolidating servers since it may run the risk of losing everything in case the server fails (Garg et al., 2010). End users have four choices for control the virtualization architecture:

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•

•

•

•

Virtualization is provided by software that is installed on the host or on all application hosts, The virtualization engine is an out-of-band solution, that passes the virtual volume descriptions to the application hosts, The virtualization engine is an in-band solution located in the data path so that every request travels through that device, Virtualization is provided in the storage architecture by switches and array controller microcode (Tomic & Markic, 2010).

Virtualization supports cost savings by reducing hardware. By consolidating servers, reducing down time and improving application performance and freeing up critical resources, virtualization helps to save up to 80% of running costs (Garg et al., 2010). The most spectacular achievements of IT resources virtualization have been noticed in VMware. The VMware technologies enable data centers’ decrease of electricity consumption by 70-80% and provide a flexible computing environment with much additional operational efficiency, including business continuity, rapid provisioning and automation, and standardized operating procedures (Poniatowski, 2010). Now, with VMware vSphere 4.0 the 100% virtual data center is capable of handling the most mission–critical workloads on virtual machines. Usually, 30-40 virtual machines are found on a single multicore server. VMware is considered as the clear leader in virtual server software selection. According to Forrester Research Inc. survey 98% of respondents indicating that they have ESX in their environment, 17% of respondents state that they use either Microsoft Virtual Server 2005 or Hyper-V, closely followed by Citrix’s Xen Server at 10%. Respondents noticed the benefits in a virtual server environment i.e. 23% of respondents ranked performance, 19% named backup success, and 14% named capacity efficiency (Poniatowski, 2010).


Strategies for lowering overall energy consumption include a broad range of activities. Microsoft IT has been engaged in projects, which are targeted data center, various layers of the applications and specific server workloads. Consolidation efforts include Right Sizing, Storage Utility, Compute Utility, File Server Utility and the SQL Server consolidation initiative to ensure energy efficiency, and elimination of unnecessary hardware. In addition to environmental sustainability benefits, SQL Server consolidation presents clear business benefits, such as:

many companies to consider outsourcing their data centers to external providers offering their services in grids and clouds. The first category is focused on achieving optimized and flexible processes and lower costs by improving resource utilization. At the core of this category are innovations facilitating:

•

•

• • •

Reduction of operating and capital expenses, Reduction in data center space, Provision of business continuity, scalability and availability, Provision of a standardized server build library.

The SQL Server Utility is oriented to eliminate manual steps needed to build an application environment. This can be achieved by establishing Hyper-V guests, which are built with standard software configuration, including the operating system, SQL Server, tools and approved configurations which can be provided for use in different phases of the software development life cycle.

Grid Computing Grid computing has been an attempt to manage the high number of computing nodes in distributed data centers and to achieve better utilization of distributed and heterogeneous computing resources in companies. Advances in virtualization technology enable greater decoupling between physical computing resources and software applications and promise higher industry adoption of distributed computing concepts such as grid and cloud. The continuous increase of maintenance costs and demand for additional resources as well as for scalability and flexibility of resources is leading

• •

Better utilization of computing power and data storage, On-demand provision of additional computing power and storage in order to respond to peaks in consumption, Aggregation of heterogeneous data sources in virtual data-stores.

The second category focuses on collaboration and resource sharing. At the core of this category are innovations improving: •

• •

•

The agility of businesses and their ability to respond to business opportunity by enabling the swift establishment of multienterprise collaborations, The execution of collaborative processes spanning across-enterprise boundaries, Provision and access to shared networkhosted (cloud) services that facilitate collaboration, Seamless access to heterogeneous geographically distributed data sources (Stanoevska-Slabeva & Wozniak, 2010).

Grid computing is basically deployed grid middleware or the computing enabled by grid middleware based on flexible, secure, coordinated resource sharing among a dynamic collection of individuals, institutions and resources. Grid computing means that heterogeneous pools of servers, storage systems and networks are pooled together in a virtualized system that is exposed to the user as a single computing entity. The main functionalities of a grid middleware are:

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• • • • •

• •

Heterogeneous autonomous resource virtualization and integration, Provision of information about resources and their availability, Flexible and dynamic resource allocation and management, Brokerage of resources, Security and trust in IT resources availability, security includes authentication (assertion and confirmation of the identity of a user) and authorization (check of rights to access certain services or data of users as well as accountability, Billing and payments for IT resources access, Delivery of non-trivial Quality of Service (QoS) (Reichman, 2009).

Grid computing has emerged as an attempt to provide users with the illusion of an infinitely powerful, easy-to-use computer, which can solve very complex problems. This very appealing illusion is to be provided: 1) by relying on the aggregated power of standard (thus inexpensive), geographically distributed resources owned by multiple organizations 2) by hiding as much as possible the complexity of the distributed infrastructure to users. Grid computing is the technology that enables resource virtualization, on-demand provisioning, and service (or resource) sharing between organizations. Using the utility computing model and grid computing aims at providing ubiquitous digital market of services. Frameworks providing these virtualized services must adhere to the set of standards ensuring interoperability, which is well described, open, and non-proprietary and commonly accepted in the community. Grid computing is the logical step on the IT market to the ubiquitous connectivity, virtualization, service outsourcing, product commoditization, and globalization (Plaszczak &Wellner, 2006). Examples of grid computing virtual organizations are widely described in literature (Bubak et al., 2008).

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Virtual organizations now find a new way for further development in grid environment. Grid technology provides means for harnessing the computational and storage power of widely distributed collections of computers. Computing grids are usually very large scale services that enable the sharing of heterogeneous resources (hardware and software) over an open network such as the Internet. A grid is organized in virtual organizations, collection of computational and storage resources, application software, as well as individuals (end-users) that usually have a common research area. Access to grid resources is provided to virtual organization members through the grid middleware, which exposes high-level programming and communication functionalities to application programmers and end-users, enforcing some level of resource virtualization. Virtual organization membership and service brokerage are regulated by access and usage policies agreed among the infrastructure operators, the resource providers and the resource consumers. In essence, grid computing is aiming to help standardize the way for distributed computing. A standard-based open architecture promotes extensibility, interoperability and portability. Virtual organization is an open and temporal integration of autonomic units. The openness, temporality, adhocratism and heterogeneity of resources are the reasons why the organizations act in ODOE (On Demand Operating Environment). It defines a set of integration and infrastructure management capabilities that enterprises can utilize, in a modular and incremental fashion, to become an on demand business. These are each unique services that work together to perform a variety of on demand business function. ODOE must be responsive to dynamic and unpredictable changes, variable to adapt to processes and cost structures to reduce risk, focused on core competencies and differentiated capabilities, resilient to manage changes and external threats, flexible, selfmanaging, scalable, economical, resilient, based on open standards. ODOE may be the construction


of the future, nevertheless, autonomic computing is focused on the most pressing problem facing the IT industry today: the increased complexity of the IT infrastructure that typically accompanies the increased business value delivered through computing advancements. The problem is contributing to an increasing inability of business to absorb new technology and solutions.

Cloud Computing Cloud computing is the use of the Internet (cloud) combined with a variety of computer technologies, such as software applications, servers, storage and networking components. Cloud computing is now being used in a hybrid model, whereby companies are splitting their workloads between their own data center and the cloud. A cloud is a pool of virtualized computer resources. Cloud computing is resulting from the convergence of grid computing, utility computing and SaaS (Software as a Service) and essentially represents the increasing trend towards the external deployment of IT resources, such as computational power, storage or business applications and obtaining them as services. Cloud computing refers to both the applications delivered as services over the Internet and the hardware and system software in the data centers that provide the services. The data center hardware and software is what is named a cloud (Stanoevska-Slabeva & Wozniak, 2010a). When cloud resources are made available in a pay-asyou-go manner to the general public, it is called a public cloud. In public clouds services provider is the owner and manager, services are accessible by subscription, and driven by standardization. The term private cloud refers to internal data centers of a business or other organization, not made available to the general public. Private clouds allow for services defined by company, facilitate service customization, retain services utilization control integrity and improve interorganizational efficiency. In cloud the virtualized services are provided through a defined abstracting interface

API (Application Programming Interface). Thus at the hardware level, resources can be added or withdrawn according to demand posted through the interface, while the interface to the user is not changing. Because some cloud computing environments use server and storage grid architecture, cloud computing is sometimes confused with grid computing. In theory, cloud-computing is similar to utility-based computing or traditional outsourcing. There are many benefits to cloud computing besides the reduction of infrastructure cost and operational support. Because the infrastructure resides at the cloud provider, capital expenditures are minimized. This includes data center real estate, electricity, cooling, server, storage, network technology procurement, and the cost of resources to manage the environment. Reducing time to market on the release of new applications is also a benefit. Some cloud providers offer a set of development tools that can reduce the time to develop new applications from months to weeks. Cloud services providers realize the efficiencies of a virtualized environment with resource management to maximize resource utilization efficiencies. There is a growing number of cloud computing providers. Some of the dominant on the market are Hewlett-Packard, Microsoft, Sun Microsystems, Salesforce.com, EMC, Amazon, Google. HP offers a variety of cloud services; HP’s strategy is the company’s entrance into cloud computing with HP Adaptive Infrastructure as a Service (AIaaS), which lets customers host applications in HP data centers optimized for Microsoft Exchange, SAP applications, and other critical business applications. Providers such as Google and Amazon offer cloud-computing solutions for e-mail, collaboration, and other web-related services. Googles Apps cloud covers services such as email and collaboration. The tools are available to subscribers and are completely web-based. Google Apps offers voice and video chat, calendars, and instant messaging, a service to store documents, provide content management and provide secure video sharing. Amazon EC2 (Amazon Elastic Compute

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Cloud) is a web service that provide computing capacity in the cloud. Amazon EC2’s web service interface allows clients to obtain and configure capacity. It runs within Amazon’s data centers, and is managed by Amazon’s technical support staff. Amazon EC2 helps provision new server resources via the Internet without the hardware and operational expenses (Poniatowski, 2010). Cloud computing is a way to increase capacity and add capabilities without investing in new infrastructure, training new staff and licensing new software. By pooling resources into large clouds, companies can cut down costs and increase utilization by delivering resources only for as long as those resources are needed. Cloud computing allows individuals, teams and organizations to streamline procurement processes and eliminate the need to duplicate certain computer administrative skills related to configuration and support. A cloud computing have the potential to reduce enterprise energy dependency. Today data centers are overcrowded, consuming a huge amount of energy resources. Cloud computing allows companies to evolve to a greener, more holistic approach for data center management, permits to achieve greater economies of scale, workload balancing and the integration of IT services with power and facilities management. With its focus on resource conservation, cloud computing encourages goods service management practices like enterprise content management, which helps keep the volume of active data under control via regular archival and disposal of redundant data. Companies and government agencies are using cloud computing to make services and applications accessible and economical for emerging nations – providing the means to improve their agriculture production, healthcare, education systems (CIO, 2009). Around the world people with mobile devices will be able to connect with a cloud infrastructure for real-time services and information. IBM recommends that companies put in place three fundamental prerequisites in order to accelerate enterprise adoption and optimize

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return on investment: dynamic infrastructure, IT services affinity assessment and cloud strategy. Virtualization, which is regarded as the cornerstone technology for all cloud computing architecture is mainly used for abstraction and sharing the IT resources. Virtualization allows unifying raw hardware, storage and network resources as well as encapsulation of resources i.e. applications ultimately improve security, manageability and isolation. Another important feature of clouds is the integration of hardware and system software with applications. Both hardware and system software, or infrastructure and the applications are offered as a service in an integrated manner. IaaS (Infrastructure as a Service) offers comprise computing resources such as processing or storage which can be obtained as a service. Examples are Amazon Web Services with its EC2 (Elastic Compute Cloud) for processing and S3 (Simple Storage Service) for storage. Instead of selling raw hardware infrastructure, IaaS providers typically offer virtualized infrastructure as a service. Therefore, hardware level resources are abstracted and encapsulated and exposed to upper layer and to end users through standardized interface as unified resources. PaaS (Platforms as a Service) offers are targeted at software developers, which can write applications according to the specification of a particular platform without needing to worry about the underlying hardware infrastructure. PaaS offers can cover all phases of software development or may be specialized around a specific area like content management. Examples are the Google App Engine, which allows applications to be run on Google’ infrastructure and Salesforce’s Force.com platform. Software as a Service (SaaS) is software that is managed and distributed in a pay-per-use manner. For user, obtaining software as a service is mainly motivated by cost advantages due to the utility-based payment model. Examples of SaaS offers are Salesforce.com and Google Apps such as Google Mail and Google Docs and Spreadsheets (Stanoevska-Slabeva & Wozniak, 2010a).


Virtualization, cloud computing and grid computing are perceived as a green computing which is oriented towards the use of computers in an environmentally responsible way. “The Recycle, Reuse and Reduce” strategy has been adapted by several companies to get rid of non-biogradable materials such as PCs and laptops which can no longer be used. First step of the approach is an analysis and evaluation of IT resources usability. The results should be included as the premises of decisions on virtualization. The green computing approach covers many different activities to reduce energy consumption and harmful emissions. Recycled paper is also being used at offices to reduce the paper consumption. Dell company offers to collect and recycle desktops and laptops which can no longer be used. Green computing is to include the deployment of energy efficient servers, peripherals and central processing units with reduced resource utilization (Garg et al., 2010).

MAIN FOCUS OF THE CHAPTER: FROM VIRTUALIZATION TECHNOLOGY TO VIRTUALIZATION MANAGEMENT In 1987, the WCED (the World Commission on Environment and Development) related sustainability to corporations and the economy by defining the term sustainable development as the development that meets the needs of the present without comprising the ability of future generations to meet their own needs (Russell et al., 2007, Clarke, 2007, Hilty & Seifert, 2005). The concept of corporate sustainability is one that is gaining increasing importance as progressively more research suggests the need for organizations to address sustainability issues in order to resolve environmental and social problems. Sustainability is interpreted as the simultaneous effort of balancing economic, technological and environmental goals for a corporation. As such sustainability is another metaphor for describing

corporate social responsibility, corporate citizenship and ethical business conduct. The etymology of “sustainable” carries interesting and important implications for the way the word is used as it includes several contradictions. The word “sustain” is derived form the Latin “sub-tenere”, meaning “to uphold”. This carries as passive connotation in it and gives the concept an image of stability, persistence and balance. “Sustainable” is used in a more active sense together with “development”. Development means change, progress and growth. Hence, ”sustainable development” can refer to a process which is being uphold or defended at the same time as it implies movement and improvement (Sunden and Wicander, 2005). Sustainable development is interpreted as a change that emanate out from a need or demand. The concept of sustainable development implies a resource dimension and a competition between the different interest of stakeholders for resources (IT resources also). Therefore, the model of sustainable development should be negotiated among business partners. The compromise achieved in sustainable collaborations of business partners is to provide some direct economic benefits: • •

• • •

•

Revenue enhancement and improved market access, Cost reduction and joint projects development focused on internal activities, services that access the best through the network, improved purchasing outcomes from buying as a group, IT assets utilization as well as the shared access to intellectual assets, Lead time reduction and concurrent engineering practices development, Reliability enhancement through investment initiatives reduces work, schedule consistency supported by redundancy of resources, and client communications, Risk reduction: financial through sharing the new market entry costs, access to

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complementary competencies and larger experiences (Beckett, 2005). Sustainability is also considered in IT governance domain. IT governance concerns IT practices of boards and senior managers. The question is whether IT structures, processes and relational mechanisms and IT decisions are made in the interest of stakeholders. IT governance is closely related to corporate governance, the structure of the IT organization and its objectives and alignment to the business objectives. However, IT governance is the process for controlling an organization’s IT resources, including information and communication systems and technology. According to the IT Governance Institute (ITGI, 2003), IT governance is the responsibility of executives and board of directors and consists of leadership, organizational structures and processes that ensure that enterprise’s IT sustains and extends the organization’s strategies and objectives. Van Grembergen and DeHaes (2005) stand on that point and defined IT governance as the organizational capacity exercised by the Board, executive management and IT management to control the formulation and implementation of IT strategy and in this way ensure the fusion of business and IT. The primary focus of IT governance is on the responsibility of the board and executive management to control the formulation and the implementation of IT strategy, to ensure the alignment of IT and business, to identify metrics for measuring business value of IT and to manage IT risks in an effective way. While IT management is compared to the daily operational management, IT governance is much more focused on sustainable performing and transforming IT and compared to strategic management. IT governance focuses areas are (ITGI, 2003): • • • •

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Business and IT strategic alignment, IT value creation and delivery, Risk management and value presentation, IT resource management,

•

Performance measurement.

Models of IT governance for sustainability need to concentrate more on changes than stability, meaning that existing rules, practices and rights are perceived as a subject matter of governance. According to Martin et al. (2007) the challenges of governance for sustainability lie in three broad areas of change and knowledge generation i.e. innovations, reconciliation and creativity. In this chapter, sustainability is a concept and strategy for integrating and balancing three dimensions i.e. economic and social, technology and communication and the third – environmental. Sustainable business strategies and processes are roadmaps to achieve sustainability and to understand and consider the positive and negative impacts and minimizing the risk of unintended consequences across sustainability dimensions. Strategy process research covers the way business strategies are created, sustained and changed over time, whereas strategy content addresses the product of the strategy process and constitutes a competitive advantage. The basic question is whether structure follows strategy (Chandler, 1962) or strategy follows structure (Rumelt, 1974). The structure is equated with internal efficiency whereas strategy represents external effectiveness. According to Chandler the environment specifies the strategy and the organization has to adapt accordingly by adjusting the structure. From the perspective of a strategy context, the assumption that internal structure follows external strategic intent overlooks that internal structure also enacts the external strategy (Rasche, 2008). Strategy followed by structure is developed for virtualized resources’ users, so they are able to construct their own business strategies assuming joint access and sharing virtualized storages and computing capabilities. The business strategy is the determination of long term goals and objectives, the adoption of courses of action and associated allocation of resources required to achieve strategic goals. Changes in IT resources,


Figure 1. IT governance for business sustainability

in the organizational structure and IT resources virtualization opportunities lead to determining a new organizational strategy. Therefore, the strategy realization must be followed by enterprise engineering and virtualization opportunities analysis as well as the utilization of the feedback for the strategy re-formulation. The business strategy can be identified with a selected way of creating a fit between external environment and internal resources and capabilities. Business and IT strategy are evaluated in the aspect of their internal consistency, ability to be suitable and adaptable to the changing business environment, abilities to ensure competitive advantage or just their flexibility. A comprehensive representation of a business sustainability model is needed to understand its dynamic behavior, processes, resources, internal and external stakeholders and the constraints. Business modeling by processes facilitates developing business strategy, conducting business operations and designing information systems aligned with business organization and procedures. In this chapter, the sustainability model is an integrated model of environmental, informational, social and economic dimensions of business that helps to understand the complexities and impact of sustainability issues (see Figure 1). The sustainable business development approach begins with developing sustainable business

strategies and applying these strategies to tactical decision making and operational procedures, which in turn requires reorganization and redesign of business processes. There are three points to the strategic planning process i.e. identifying top priorities related to sustainable development, making strategies operational, recognition of risk and business opportunities. The reformulation and redesign of the business and IT strategy can be realized through comprehensive modeling of a business using critical success factors and key performance indicators (see Figure 1). Existing enterprise systems may not capture the data required for sustainability modeling and reporting. The IT governance for sustainability is determined by business strategy, management approach, performance indicators, IT strategy, IT management and virtualization opportunities. The economic dimension of sustainability concerns the organization’s impact on the economic conditions of its stakeholders and on economic systems at local, national and global levels. Economic performance indicators cover economic performance measures (e.g. financial implications and other risks as well as social responsibility measures), image on markets and indirect economic impacts. The environmental dimension of sustainability concerns an organization’s impacts on living and

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non-living natural systems (including ecosystems, land, air and water) and outputs (e.g. harmful emissions and wastages). They cover performance to biodiversity, environmental compliance and other relevant information such as environmental expenditures and their impacts on products and services. The business strategy should integrate long-term economic and environmental aspects and the evaluations based on the indicators ought to be utilized in further business strategy re-formulation. IT governance for sustainability means a balance among the economic activities and environmental responsibilities (including social responsibility). Although business organizations are oriented towards creating value for the company’s shareholders, the environmental responsibility is equally important. Economic indicators include measures of a competitive return on investment, of protecting the company’s assets and enhancing the company’s reputation and brand image through integration of sustainable development thinking with business practices. Building capacity for further economic development, supporting the protection and efficient exploitation of IT resources, promoting positive attitude of employees towards energy consumption monitoring and controlling of IT assets should also be considered. The business organization should make a distinction between IT strategy and IT management. IT strategy is an objective, but IT management approach is a process accompanied by actions. Talking about strategy as an organizational capability means strategy management i.e. the constant renewal of strategy to align and keep pace with the evolution of customer and marketplace needs. New information technology expands the business strategy, because it uncovers the new opportunities that organization can explore i.e. IT resources virtualization. Following Mintzberg and Queen (1991), the strategy is considered as a plan. The general plan for IT resources virtualization could cover the steps:

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•

• • • •

Understanding the benefits of virtualization, so issues like saving money, simplification of management, disaster recovery opportunities, emissions’ reduction should be analyzed, Evaluating a virtualization solution, and selecting the right services providers, Verification if applications are going to work properly with virtualization, Analyzing the cost of virtualization of server infrastructure, Analyzing the time and capabilities needed to virtualize the IT resources i.e. server, storage, desktops.

However, given a vision to achieve sustainable IT resources virtualization development, the following principles are applied: •

• • •

Continual refinement of the products and project practices (assuming that IT resources virtualization has been done through projects), Working products and services at all times, Continual investment in and emphasis on design, Valuing defect prevention over defect detection (Tate, 2005).

IT products and services for sustainability should always be in a state of continual construction as any working prototypes. This approach allows increasing the products’ quality. Properly working products are also required for sustainable development because it ensures that the manufacturing time was spent on productive activities. A constant emphasis on designs should also be required for sustainable development because innovative technologies, good designs and sustainable design practices extend the life of the products by keeping their exploitation in a healthy state, which simplify the maintainability processes.


Without establishing and monitoring performance measures, it is unlikely that the IT governance will achieve its desired outcomes. The performance measurement domain closes the loop and provides feedback to the alignment domain by providing evidence that the IT governance initiative is on track and creating the opportunity to take timely corrective measures. Beneficiaries of IT resources sharing in virtualization processes and in virtual organizations, although they are temporal, exist on a long-term basis. Participating companies find agreements, for example, on the goals, on the internal rules of providing services i.e. IaaS, SaaS, PaaS. All members have to agree upon rules on how to allocate rules and tasks and consequently on how to share profit and losses, also for tax purposes in compliance with applicable rules and regulations (Cevenini, 2002). As a general principle, partners can regulate their relationships by agreement, but agreements cannot possibly cover each and every present and future task and interactions. They may be renewed or rewritten; otherwise the stability of rules would be lost. For what is not specifically provided for in the agreements, codes and law in force can be applied. An agreement is an arrangement between parties regarding a method of action. The goal of this arrangement is to regulate the cooperation actions among partners and it is always associated with a contract (Camarinha-Matos et al., 2005). A contract is an agreement between two or more competent parties in which an offer is made and accepted and each party benefits. A contract defines the duties, rights, and obligations of the parties, remedy clauses as well as other clauses that are important to characterize the goal of the contract. In a maturing IT governance environment, service level agreements (SLAs) and their supporting service level management (SLM) process need to play an important role. The functions of SLAs are:

•

•

To define what levels of service are acceptable by users and attainable by the service provider, To define the mutually acceptable and agreed-upon set of indicators of the quality of service.

The SLM process includes defining an SLA framework, establishing SLAs including level of service and their corresponding metrics, monitoring and reporting on the achieved services and problems encountered, reviewing SLAs and establishing improvement programs. The major governance challenges are that the service levels are to be expressed in business terms and the right SLM/SLA process has to be put in place. The roles most commonly given to SLAs can generally be grouped into six areas: •

•

•

•

•

Defining roles and accountability. In virtual organizations a service provider in one SLA can be the customer in another SLA and vice versa. Service level agreements will be used to re-establish the chain of accountability. Managing the customer’s expectations regarding a product’s delivery on three performance levels (from the top): engineered level, delivered level, guaranteed level. Control implementation and execution, although customers tend to use SLAs to ensure preferential treatment for their particular service requirements relative to all the others in the service provider’s network. Providing verification on the customer side. This is especially important to companies that opt for higher levels of QoS. Enabling communications for both service providers and customers to address their needs, expectations, performance relative to those expectations and progress on action items (Lee & Ben-Natan, 2001, Ruijs & Schotanus, 2002, Scholz & Turowski, 2002).

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The goal of SLM is to maintain and improve IT service quality through a constant cycle of agreeing, monitoring, reporting and reviewing IT service achievements (Maestranzi et al., 2002, Gatial et al., 2008). The SLM process is responsible for ensuring the service level agreements and any underpinning operational level agreements (OLAs) or contracts are met, and for ensuring that any adverse impact on service quality is kept to a minimum. The process involves assessing the impact of changes upon service quality and SLAs, both when changes are proposed and after they have been implemented. Some of the most important targets set in the SLAs will relate to service availability and thus require incident resolution within agreed periods.

FUTURE RESEARCH DIRECTIONS AND CONCLUSIONS Sustainability exemplifies the new problem field for managers and corporate leaders: an emerging network-based organizational world where business units must maintain consistency of purpose and identity, although they must be flexible enough to interact and compete in conditions of constant change, to share IT resources and to add new capabilities, to reduce energy consumption and emissions of harmful substances. The factors influencing on sustainability are competences, resources, project management, IT management, organizational integration, policy and regulatory framework, business strategies and conflict resolution abilities. In the IT resources virtualization networked approach partners (who may compete in other areas of marketplace) join to share the resources in the value creation process. Participating in an IT resources virtualization network is an increasingly strong motivator for accessing required capabilities. The customers, taking into account the observed benefits, are able to emphasize their requirements concerning the IT services. Partnering enables a joint development

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of business opportunities, mutual understanding and trust among service recipients and providers. Using the utility computing model, grid aims at provisioning the virtualized services, that must adhere to the set of standards ensuring interoperability, access and common acceptance within the community of beneficiaries of IT resources’ virtualization. The benefits of virtualization cover more effective utilization of common IT resources, common access to more resources with unique capabilities, increase of efficiency of IT resources utilization, and cost efficiency of IT. Grid computing or private cloud computing are about controlled sharing. Resources owners want to enforce policies that constrain access according to group membership and abilities to pay. The grid computing and cloud computing are technologies not yet mature. That innovations development should be accompanied by the focus on business models to support management of the virtualization processes. For the last few years, focus on environmental sustainability issues influences on green IT concepts, emphasizing the reducton of the environmental impact of doing business and the IT development. Therefore more control over user activities, cost savings reporting are necessary, however at first pro-ecological approach should be implemented in the business strategy management process.

REFERENCES Beckett, R. C. (2005). Perceptions of value that sustain collaborative networks. In CamarinhaMatos, L. M., Afsarmanesh, H., & Ortiz, A. (Eds.), Collaborative networks and their breeding environments (pp. 329–337). New York, NY: Springer. doi:10.1007/0-387-29360-4_34 Bubak, M., Turala, M., & Wiatr, M. (2008). Cracow’07 Grid Workshop Proceedings, Cracow, Academic Computer Centre Cyfronet AGH.


Cala, J., & Zielinski, K. (2007). Influence of virtualization on process of Grid application deployment – CCM case study. In M. Bubak, M.Turala, & M. Wiatr (Eds.), Cracow’06 Grid Workshop Proceedings (pp. 367-375). Cracow, Poland: Academic Computer Centre Cyfronet AGH.

Gatial, E., Balogh, Z., Seleng, M., & Hluchy, L. (2008). Knowledge-based negotiation of service level agreement. In M. Bubak, M. Turala, & M. Wiatr (Eds.), Cracow’07 Grid Workshop Proceedings (pp. 134-139). Cracow, Poland: Academic Computer Centre Cyfronet AGH.

Camarinha-Matos, L. M., Silveri, I., Afsarmanesh, H., & Oliveira, A. I. (2005). Towards a framework for creation of dynamic virtual organizations. In Camarinha-Matos, L. M., Afsarmanesh, H., & Ortiz, A. (Eds.), Collaborative networks and their breeding environments (pp. 69–80). Berlin, Germany: Springer. doi:10.1007/0-387-29360-4_7

Hilty, L. M. Seifert, E. K., & Treibert, R. (2005). Information Systems for sustainable development. Hershey, PA: Idea Group Hershey.

Cevenini, C. (2002). What regulation for virtual organizations? In Franke, U. (Ed.), Managing vrtual Web organizations in the 21st century: Issues and challenges (pp. 318–339). Hershey, PA: IGI Global Publications. Chandler, A. D. (1962). Strategy and structure– chapters in the history of the industrial enterprise. Cambridge, MA: MIT Press. CIO. (2009). Staying aloft in tough times: Why smart, innovative businesses are turning to cloud computing. CIO White Paper, April. Retrieved October 13, 2009, from http://reg.accelacomm. com/servlet/Frs.FrsGetContent?id=50851009 Clarke, T. (2007). The materiality of sustainability. In Benn, S., & Dunphy, D. (Eds.), Corporate governance and sustainability (pp. 219–251). London, UK: Routledge. Garg, M., Gupta, S., Goh, M., Desouza, R., Sundarkarni, B., & Kuswoyo Bong, R. (2010). Sustaining the green Information Technology movement. In Bajgoric, N. (Ed.), Always-on enterprise Information Systems for business continuance (pp. 218–230). Hershey, PA/ New York, NY: Business Science Reference. doi:10.4018/978-1-60566723-2.ch013

IBM. (2008). Data recovery and high availability guide and reference –DB2 version 9.5 for Linux, UNIX, and Windows. Retrieved on May 12, 2008, from http://www-01.imb.com ITGI. (2003). Board briefing on IT governance, 2nd ed. Rolling Meadows, IL: IT Governance Institute, SAD. Lee, J. J., & Ben-Natan, R. (2002). Integrating service level agreements, optimizing your OSS for SLA delivery. Indianapolis, IN: Wiley Publishing Inc. Maestranzi, P., Aay, R., & Seery, R. (2002). A business-focused service level management framework. In van Bon, L. (Ed.), The guide to IT service management (pp. 778–798). London, UK: Addison-Wesley. Martin, A., Benn, S., & Dunphy, D. (2007). Towards a model of governance for sustainability. In Benn, S., & Dunphy, D. (Eds.), Corporate governance and sustainability (pp. 94–121). London, UK: Routledge. Minoli, D. (2005). A networking approach to grid computing. Hoboken, NJ: J. Wiley & Sons. Mintzberg, H., & Quinn, J. B. (1991). The strategy process: Concepts, contexts, cases. Englewood Cliffs, NJ: Prentice Hall. Moore, F. G. (2006). Storage virtualization for IT flexibility. Retrieved October 13, 2009, from http://www.sun.com/storage/virtualization/StgVirtWP.pdf

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Plaszczak, P., & Wellner, R. (2006). Grid computing, the savvy manager’s guide. Amsterdam, The Netherlands: Elsevier. Poniatowski, M. (2010). Foundation of green IT, consolidation, virtualization, efficiency and ROI in the data center. Upper Saddle River, NJ: Prentice Hall. Rasche, A. (2008). The paradoxical foundation of strategic management. Heidelberg, Germany: Physica-Verlag, A Springer company. Reichman, A. (2009). Storage choices for virtual server environments. Retrieved October 13, 2009, from http://www.emc.com/collateral/ analyst-reports/2009-forrester-storage-choicesvirtual-server.pdf Ruijs, L., & Schotanus, A. (2002). Managing the delivery of business information. In van Bon, J. (Ed.), The guide to IT service management (pp. 165–177). London, UK: Addison-Wesley. Rumelt, R. P. (1974). Strategy, structure, and economic performance. Cambridge, MA: Harvard University Press. Russell, S., Haigh, N., & Griffiths, A. (2007). Understanding corporate sustainability. In Benn, S., & Dunphy, D. (Eds.), Corporate governance and sustainability (pp. 36–56). London, UK: Routledge. Scholz, A., & Turowski, K. (2002). Enforcing performance guarantees based on performance service levels. In van Bon, J. (Ed.), The guide to IT service management (pp. 302–311). London, UK: Addison-Wesley. Stanoevska-Slabeva, K., & Wozniak, T. (2010a). Introduction: Business and Technological drivers to Grid computing. In Stanoevska–Slabeva, K., Wozniak, T., & Ristol, S. (Eds.), Grid and cloud computing, a business perspective on technology and applications (pp. 3–13). Heidelberg, Germany: Springer. doi:10.1007/978-3-642-05193-7_1

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Stanoevska-Slabeva, K., & Wozniak, T. (2010b). Cloud basic–an introduction to cloud computing. In Stanoevska–Slabeva, K., Wozniak, T., & Ristol, S. (Eds.), Grid and cloud computing, a business perspective on technology and applications (pp. 47–63). Heidelberg, Germany: Springer. doi:10.1007/978-3-642-05193-7_4 Sunden, S., & Wicander, G. (2005). ICT in developing countries: To be sustainable or not – is that the question? In E. Nelssen (Ed.), ISD’2005 Proceedings of the Fourteenth International Conference on Information Systems Development: Pre-Conference (pp. 103-115). Karlstad, Sweden: Karlstad University. Tate, K. (2005). Sustainable software development: An agile perspective. Upper Saddle River, NJ: Addison Wesley Professional, Pearson Education. Tate, K. (2005). Sustainable software development: An agile perspective. Upper Saddle River, NJ: Addison Wesley Professional, Pearson Education. Tomic, D., & Markic, B. (2010). Continuous database availability. In Bajgoric, N. (Ed.), Always-on enterprise Information Systems for business continuance (pp. 129–148). Hershey, PA: Business Science Reference. doi:10.4018/978-160566-723-2.ch008 Van Grembergen, W., & DeHaes, S. (2005). Measuring and improving IT governance through the balanced scorecard. Information System Control Journal, 2. Retrieved October 13, 2009, from http://www.itgi.org/Template. cfm?Section=Home&Template=/ContentManagement/ContentDisplay.cfm&ContentID=24172

KEY TERMS AND DEFINITIONS Virtualization: The software technology, referring to the abstraction of computer resources,


enabling implementation of virtual machines working like a real machines. Grid Computing: The technology enabling resource virtualization, on demand computing, and service (or resource) sharing between organizations. It enables sharing of a wide range of resources including storage, networks and scientific instruments such as microscopes, x-ray sources, and earthquake engineering test facilities. Cloud Computing: The use of the Internet combined with a variety of computer technologies, such as software applications, servers, storage and networking components. The components provide access to Software as a Service (SaaS), Web 2.0 and other common Internet-related services. ODOE: The business computing model enabling business flexibility and IT simplification,

integration of people, processes and information in a Service Oriented Architecture. SLA: A Service Level Agreement, it is a part of Information Technology service contract, where the level of service is formally defined. IT Strategy: Objective and plan of deployment of Information Technology. IT Governance: IT governing system, in which all stakeholders have the necessary input into the decision making process as well as abilities to control and affect the performance of an organization. Sustainability: The capabilities of long-term maintenance of wellbeing as well as the responsibility for the utilization of natural resources.

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Chapter 7

An Introduction to the Green IT Balanced Scorecard as a Strategic IT Management System Yulia Wati Chosun University, South Korea Chulmo Koo Chosun University, South Korea

ABSTRACT This chapter introduces the Green IT Balanced Scorecard by incorporating an environmental aspect of technology into the scorecard measurement method. The authors conceptualized the Green IT balanced scorecard as “a nomological management tool to systematically align IT strategy with business strategy from an environmental sustainability perspective in order to achieve competitive advantage.” The objectives of the Green IT balanced scorecard include the measurement of technology performance via the effective integration of environmental aspects, the investigation of both tangible and intangible assets of Green IT investment, the alignment of IT performance and business performance, and the transformation of the results into competitive advantage. This concept offers a new possibility for both practitioners and researchers to translate their sustainable business strategies into Green IT actions.

INTRODUCTION The Strategic Balanced Scorecard (BSC) was first introduced in 1992 by Kaplan and Norton as a DOI: 10.4018/978-1-60960-531-5.ch007

measurement tool used to achieve corporate goals in a dynamic environment (Kaplan and Norton, 1996). The basic concept of this balance scorecard was to translate an organization’s mission and strategy into a comprehensive set of performance measures that establishes the framework


An Introduction to the Green IT Balanced Scorecard as a Strategic IT Management System

for a strategic measurement and measurement system. This scorecard was created to supplement traditional financial measures with criteria that assessed performance from three additional perspectives: namely, customer, internal business process, and learning and growth perspectives (Kaplan and Norton, 1996). This scorecard also allowed companies to track financial results while simultaneously monitoring their progress in building the capabilities and acquiring the intangible assets they would require for future growth. These intangible assets affect a company’s performance by enhancing the internal processes most crucial to the creation of value for customers and stakeholders (Kaplan and Norton, 2004). The Balanced Scorecard has already been implemented at corporate, strategic business unit, shared service functions, and even individual levels (Epstein and Rejc, 2005). Since the first introduction of BSC, the tool has undergone a significant evolution, driven by a series of external factors (Cram, 2007), including the IT environment. The adoption of a balanced scorecard in IT functions and its processes has been previously conducted by some researchers (e.g. CIO, 2003; Martinsons et al., 1999; Van Grembergen, 2000). The ITbalanced scorecard has also been adopted as the foundation of specific IT scorecards such as ERP (e.g. Chand, 2005; Rosemann and Wiese, 1999; Rosemann, 2001). However, until this stage, even though this scorecard has successfully integrated some important IT aspects and aligned them with business strategies, this IT management tool does not include environmental aspects as a component of imperative business drivers. Environmental concerns have become increasingly important in the business world; however, those concerns are only incompletely reflected in economic transactions (Figge et al., 2002). Therefore, in this paper we have incorporated the environmental aspects of technology into scorecard measurement, as one of the soft factors that may ultimately prove more important than the efficient use of investment capital. We identified our model as the Green IT

Balanced Scorecard. In the next sections, we will discuss in a step-by-step manner the development of the Green IT Balanced Scorecard, including the Cause and Effect Model, Green IT Metrics, and a range of recommendations for the companies when implementing this scorecard.

BACKGROUND The Development of the IT Balanced-Scorecard Since its early stages, the IT balanced scorecard has received a great deal of attention from IT researchers and IT practitioners. One of the bestknown versions of the IT balanced scorecard is the one developed by Van Grembergen and colleagues (1998, 2000). This scorecard proposed four perspectives: the User Orientation perspective represents the user evaluation of IT; the Operational Excellence perspective represents the IT processes employed to develop and deliver the applications; the Future Orientation perspective represents the human and technology resources needed by IT to deliver its services, and the Business Contribution perspective captures the business value of the IT investment (Van Grembergen, 2000). The working council for Chief Information Officers (2003) conducted an extensive review of IT scorecards and found that the most advanced scorecards shared in common the following six structural attributes: simplicity of presentation, explicit links to IT strategy, broad executive commitment, enterprise-standard metrics definitions, drill-down capability and available context, and individual manager compensation should be linked to scorecard performance. Additionally, these progressive scorecard practitioners track metrics in five key categories: financial performance, project performance, operational performance, talent management, and user satisfaction, as well as two additional metric categories--information security and enterprise initiatives.

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Moreover, Martinsons et al. (1999) proposed four perspectives: (1) user orientation with a mission to deliver value-added products and services to end users, (2) business value with a mission to contribute to the value of the business, (3) internal process with a mission to deliver IT products and services in an efficient and effective manner, and (4) future readiness with a mission to deliver continuous improvement and prepare for future challenges. They proposed three key balanced scorecard principles: cause and effect relationship, sufficient performance drivers, and linkage to financial measures. They also demonstrated that cause-and-effect relationships can involve one or more of those four perspectives. Rosemann and Wiese (1999) adopted a system-level balance scorecard approach. They employed a modified balanced scorecard approach to evaluate the implementation of ERP software and to assess the continuous operation of the ERP installation. Additionally, Brewton (2003) provided an illustration of a balanced CRM scorecard. He projected four perspectives: financial, customer, process, and staff. Fairchild (2002) attempted to devise a Balanced Knowledge Management Scorecard by viewing the scorecard from two different perspectives. The first approach involved the Knowledge Centric Organizational perspective, and the second adopted a resource managementbased approach. The details of the development of IT balanced scorecards during this decade can be observed in Table 1. The drivers of IT BSC are divided into three categories: (1) demonstration of IT value: IT BSC assist to demonstrate the IT value by providing a straightforward method of reporting on a range of IT metrics, enabling the value of IT to be quantified for the business stakeholders; (2) IT governance: A structure of relationships and processes to direct and control the enterprise in order to achieve the enterprise’s goals by adding value while balancing risk versus return over IT and its processes (COBIT, 2000); and (3) cost cutting and efficiency: using IT BSC, it is possible to

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track both the efficiency of IT activities and the efficacy of contributions to organizational goals (Cram, 2007). According to the study of Epstein and Rejc (2005), an IT performance measurement and management system must necessarily focus on the causal relationships and linkages within the organization and the actions managers can take to improve both customer and corporate profitability and increase value. In this paper, we adopted Van Grembergen’s scorecard since this model integrates the outcome measures and performance drivers systematically and establishes the cause and effect relationship fairly effectively.

SO, WHAT IS THE GREEN IT BALANCED SCORECARD, AND WHY? Currently, many organizations have an opportunity to tackle with sustainable development while improving their productivity, reducing costs, and enhancing benefits. However, their lack of environmental skills has resulted in many forms of waste, unused resources, energy inefficiency, and pollution (Watson et al., 2010). Although many companies have previously implemented specific environmental or social management systems in the past decade, as can be seen in Table 1 (p.2-3), these systems have only rarely been integrated into the general management system of the firm. As a consequence, in many cases, these systems are not linked to the economic contributions of the environmental management system (Laurinkevičiūtė, 2008). In order to address this issue, several authors have previously suggested applying the balanced scorecard approach to sustainability (e.g. Bieker, 2003; Elkington 1997; Figge et al., 2002; Johnson, 1998) in order to ascertain that environmental concerns are thoroughly considered in the decisions and activities of the other sectors (Laurinkevičiūtė, 2008).


Table 1. IT Balanced Scorecard Â€Â€Â€Â€Â€Author(s) Van Grembergen (2000); Van Grembergen et al. (2003)

Â€Â€Â€Â€Â€Objective IT Balanced Scorecard

Â€Â€Â€Â€Â€Perspectives User orientation Business contribution Operational excellence Future orientation

Chief Information Officers (2003)

IT Balanced Scorecard

Financial performance Project performance Operational performance Talent management User satisfaction Information security (additional metric) Enterprise initiatives (additional metric)

Martinsons et al. (1999)

IT Balanced Scorecard

User orientation Business value Internal process Future readiness

Hagood and Friedman (2002)

HRIS Balanced Scorecard

Customer perspective Internal process perspective Resource (financial) perspective Learning and growth perspective

Rosemann and Wiese (1999)

ERP Balanced Scorecard

Financial Customer Internal process Innovation and learning Project perspective

Brewton (2003)

CRM Balanced Scorecard

Financial Customer Process Staff

Fairchild (2002)

KM Balanced Scorecard (Knowledge Centric Organization approach)

Human capital Intellectual capital Structural capital Social capital

Fairchild (2002)

KM Balanced Scorecard (Resource Management based approach)

Employees Customers Processes Technology

Van Grembergen and De Haes (2005)

IT Governance Scorecard

Corporate contribution Stakeholders Operational excellence Future orientation

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On the other hand, undoubtedly, a growing environmental consciousness, including investments in environmental technologies, carries with it a source of business risk, particularly to brand, reputation, and shareholder value (Sigma, 2006). Therefore, a measurement on a balanced scorecard should consist of a linked set of objectives and measurements that are consistent and mutually reinforcing (Kaplan and Norton, 1997). Although various approaches to the IT balanced-scorecard have been adopted, IT researchers and practitioners should be aware of their applicability to measurements of environmental technology alignment. The adoption of Green IT could differ from other IT adoption approaches due to the importance of ethical and eco-sustainability considerations in the decision-making process (Molla, 2009). IT adoption is generally motivated by the potential economic benefits associated with the use of a technology, whereas Green IT practices may be motivated by concern for the environment, even if economic benefits might not prove tangible in the short-term (Molla, 2009). Therefore, continuing in this vein, the Green IT balanced scorecard can be viewed as “a nomological management tool to systematically align IT strategy with business strategy from environmental sustainability perspective in order to achieve competitive advantage”. Kaplan and Norton (1997) also asserted that a balanced scorecard must contain the appropriate mixture of outcome measures (lagging indicators) and performance drivers (leading indicators). Performance drivers provide early indicators as to whether or not the strategy is being successfully implemented, whereas outcome measures help to show whether operational improvements have been successfully translated into financial performance. The scorecard should strongly emphasize financial outcomes. Additionally, the scorecard should include measurements critical to the success of the unit’s established strategy. The needs, demands, goals, objectives, and/or structures of one component should be consistent with the needs, demands, goals, objectives, and/or

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structure of another component (Oh and Pinsonneault, 2007). Thus, the measures that appear on the scorecard should be integrated thoroughly into the cause-and-effect relationship that describes the trajectory of the strategy. Because the balanced scorecard is a technique for the implementation of strategy, the prerequisite for the companies before they implement a Green IT balanced scorecard approach is described as:“they have committed to environmental responsibility”. The objectives of the Green IT balanced scorecard are as follows: (1) to measure technology performance by effectively integrating environmental aspects, (2) to investigate both tangible and intangible assets of Green IT investment, and (3) to align IT performance and business performance, and transform the results into competitive advantage.

2 BASIC PILLARS Our Green IT BSC model is comprised of two distinct pillars: environmental aspects of technology and competitive advantages of Green IT implementation. These two factors are responsible for the relative significance of sustainable IT vision in the business environment. They also constitute a foundation for the formulation of further metrics scorecards.

1. Environmental Aspects of Technology A number of previous studies have demonstrated that environmental aspects are strategically relevant as a driver of performance (e.g. Aragon-Correa and Rubio- Lopez., 2007; Carmona-Moreno et al., 2004; Cohen et al., 1995; Cordeiro and Sarkis, 1997; Edwards, 1998; Gilley et al., 2000; Hamilton, 1995; Hart and Ahuja, 1996; Klassen and McLaughlin, 1996; Klassen and Whybark, 1999; Link and Naveh, 2006; Russo and Fouts, 1997; Sharma and Vredenburg, 1998; Wagner et al., 2002; Wagner, 2005;). However, in fact,


environmental issues are complex and difficult to manage, since they are components of social and natural systems (Roome, 1992). Therefore, because IT performs an integral function in almost all aspects of business, and because each stage of the IT lifecycle from manufacturing to usage and disposal can pose environmental damages (Elliot and Binney, 2008), it is necessary to include IT as one of the aspects of “environmental sustainability” (Molla et al., 2009). To represent technology within an environmental context, some researchers have coined terms such as “environmental technology” or “sustainability technology”, whereas others reference concepts such as “green technology (IT)” or “green computing”. The definitions also vary considerably. Hedwig et al. (2009) defined Green IT as all activities and efforts that incorporate ecologically friendly technologies and processes into the entire lifecycle of information and communication technology, where the sustainable operation of a data center performs a central role in this domain, focusing on the reduction of energy consumption during the operation of the data center. Shrivastava (1995) previously defined “environmental technologies” as “production equipment, method and procedures, product designs, and product delivery mechanisms that conserve energy and natural resources, minimize the environmental load of human activities, and protect the natural environment.” They include both hardware (pollution control equipment, cleaner production technologies, etc.) and operating method (e.g. waste management practices, conservation oriented work environment). From the practitioner’s perspective, Green IT has been associated principally with technologies and initiatives designed to reduce the power, cooling, and real estate expenses associated with ICT operations (Molla 2009). Molla (2009) conceptualized Green IT theory from these various definitions, and defined Green IT as “as an organization’s ability to systematically apply environmental sustainability criteria (such as pollution prevention, product

stewardship, use of clean technologies) to the design, production, sourcing, use, and disposal of the IT technical infrastructure as well as within the human and managerial components of the IT infrastructure”. Green IT issues include climate change, greenhouse gases and CO2 emission, energy usage, material usage, and electronic wastes. The Green IT offering addresses the information technology function/industry, which plays a role in reducing the environmental burdens incurred by IT and also in providing advanced technology and solutions to environmental problems (Lash and Wellington, 2007). It also affects the environment during the entirety of its life-cycle, from its production, throughout its use, to its ultimate disposal (Murugesan, 2008). As the ultimate objective of this technology is to provide a win-win solution for both the company and the environment, we defined Green IT as relating to any computer-based tools (hardware, software, equipments), mechanisms, structures, guidelines, and methodologies as the results of environmental breakthrough at each stage of the technology’s life-cycle, including use, design, manufacture, and reuse, refurbish, and disposal of technology in environmentally sound manners (to deliver sustainable values for business, environment, and society, and at the same time, improve the quality of life). We identified this environmental aspect of technology as one of the basic pillars of our Green IT BSC, as this factor helps to enhance companies’ performance in some regards.

2. Green IT and Competitive Advantage Currently, organizations are attempting to transform themselves for future competition based on information and intangible assets, which have become increasingly important in the global economy (Herath et al. 2010). The previous literature has highlighted several benefits arising from the integration of environmental sustainability

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issues into business operations, such as increased efficiency in the use of resources, return on investments, increased sales, the development of new markets, improved corporate image, product differentiation, and enhanced competitive advantage (Albino et al., 2009). Environmental technologies have been purported to function as a potential strategic resource, because they affect the value chain at a number of points. These technologies are capable of providing firms with unique and inimitable advantages at each stage of the value chain (Shrivastava, 1995). Porter and Van Der Linde (1995) previously demonstrated that companies may achieve competitive benefits if they address the environmental impacts via innovation offsets. These innovation offsets are broadly divided into process offsets and product offsets. Product offsets occur in cases in which environmental regulation generates not just less pollution, but also creates better performing or higher quality products, safer products, lower product costs, products with higher resale or scrap value (due to ease of recycling or disassembly) or lower product disposal costs for the user. These process offsets might deliver a variety of benefits, including: •

• • • • • • • •

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Materials savings resulting from more complete processing, substitution, reuse, or recycling of production inputs Increases in process yields Less downtime through more careful monitoring and maintenance Better utilization of byproducts Conversion of waste into valuable forms Lower energy consumption during the production process Reduced material storage and handling costs Savings from safer workplace conditions Eliminates activity costs involved in discharges or waste handling, transportation, and disposal

•

Improvement in the product as a byproduct of process changes

Process offsets occur in cases in which environmental regulations not only lead to reduced pollution, but also result in higher resource productivity (Porter and Van der Linde, 1995). The benefits can be gained in the following forms: • • • • • •

Higher quality, more consistent products Lower product costs and packaging costs More efficient use of byproducts Safer products Lower net costs of product disposal for customers Higher product resale and scrap value

Environmental technologies integrate environmental considerations into many aspects of business operations, thereby affecting the competitive landscape in most sectors of the economy (Shrivastava, 1995). By considering these possible benefits, environmental technologies should be aligned to harmonize technologies and businesses with the natural environment (Shrivastava, 1995). Thus, we determined that green IT facilitates different forms of competitive advantage in three dimensions of technology: infrastructure, usage, and strategic. Infrastructure value refers to the nature of hardware and software platforms, annual enhancements to these platforms, the nature of network and data architectures, and the corporate standards for the procurement and deployment of IT assets (Sambamurthy and Zmud, 1999). The usage value refers to the IT characteristics that address the prioritization, planning, budgeting, and day-to-day delivery of operations and services, whereas strategic value refers to the manner in which the companies use their IT capabilities to generate knowledge (Sambamurthy and Zmud, 1999). We summarized the possible competitive advantages achievable though Green IT adoption (Shrivastava, 1995) into three value dimensions (Table 2). However, it should be noted herein


Table 2. Competitive Advantages of Green IT Dimensions of Value

Â€Â€Â€Â€Â€Description of Benefits

Infrastructure

• Reduction of liabilities Â€Â€Â€Â€Green technologies may address long-term issues such as risks of resource depletion, product liabilities, pollution, and waste. • Social and health benefits Â€Â€Â€Â€Green technologies benefit the ecosystem and the environment of communities in which companies operate.

Usage/operational

• Cost reduction Â€Â€Â€Â€Green technologies offer the opportunity to drive down operating costs by exploiting ecological efficiencies • Revenue enhancement Â€Â€Â€Â€Green technology creates possibilities for revenue enhancement, because it allows the companies to enter the growing market for environmental products and technologies and may expand the market segment, particularly to green customers. • Quality improvement Â€Â€Â€Â€Green technologies reinforce the environmental management philosophy. Moreover, technology assessment allows quality concerns to be incorporated in the very early stages of selecting product and production technologies.

Strategic

• Supplier ties Â€Â€Â€Â€Manufacturing for the environment and design for disassembly actively involves suppliers in corporate decision-making, in turn strengthening supplier ties • Competitive edge Â€Â€Â€Â€Competitive advantage accrues directly from cost reductions and revenue improvements resulting from environmental technologies. Environmental technologies also offer companies the potential to create unique and inimitable strategies. • Public image Â€Â€Â€Â€Green technologies are good for public relations and corporate image. • Regulation compliance Â€Â€Â€Â€Green technology solutions allow companies to comply with the environmental regulations and establish a firmer footing with regard to environment environmental and product liabilities. • Competitive landscape Â€Â€Â€Â€Green technologies allow firms to remain competitive in global markets, reduce costs and production times, and enhance strategic flexibility.

(Adapted from Shrivastava 1995)

that different environmental management practices may result in different types of competitive advantage (Christman, 2000).

IT GOVERNANCE AND IT BALANCED-SCORECARD IT governance is a component of corporate governance and is tasked with providing the organizational structures that enable the creation of business value through IT, the assurance that the corporate resources have been allocated to the right projects, and the existence of adequate IT control mechanisms (Van Grembergen, 2000). IT governance provides the structure linking IT processes, IT resources, and information to enterprise

strategies and objectives (COBIT, 2000). Among the various definitions of IT governance, we adopted the definition of IT governance developed by Van Grembergen (2000) and Weill (2004), as these definitions encompass the IT governance aspects from a strategic viewpoint. Van Grembergen (2000) defined this as “the organizational capacity to control the formulation and implementation of IT strategy and guide to proper direction for the purpose of achieving competitive advantages for the corporation”. Weill (2004) defined IT governance as “the framework for decision rights and accountabilities to encourage desirable behavior in the use of IT”. According to the relevant literature, IT governance includes IT-business alignment, decision-making process, and competitive advantages, and we defined IT governance as “the

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organizational ability to provide a systematic framework for decision-making process during the formulation and implementation of IT strategy as a direction to achieve competitive advantages for the corporation”. The objectives of IT governance are as follows: (1) IT is aligned with business, enables business success, and maximizes benefits; (2) IT resources are utilized responsibly; (3) IT-related risks are appropriately managed (COBIT, 2000). The most critical element of IT governance is the alignment of IT with the business, which leads to the creation of business value (De Haes and Van Grembergen, 2004). According to De Haes and Van Grembergen (2008), IT governance can be set up using a variety of structures, processes, and relational mechanisms. In this case, the relevant structures include structural devices and mechanisms for connecting and enabling horizontal, or liaison, contacts between business and IT management functions. Processes refer to the ‘formalization and institutionalization of strategic IT decision-making or IT monitoring procedures (e.g. IT balanced scorecard), and relational mechanisms refer to the active participation in, and collaborative relationships among corporate executives, IT management, and business management. With regard to environment, in the past year, many organizations have integrated environmental management systems into their IT mechanisms. Thus, when companies perceive the need to address the climate change issue in their business strategy, they also must implement a strategy aimed at balancing the social, environmental, and economic needs of both the company and the society at large (Epstein and Roy, 2001). This integration with the environmental management system will prevent adverse environmental effects and improve environmental performance by institutionalizing a variety of environmental programs and practices such as the initiation of environment-associated performance measures

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and the development of green technologies, processes, and products (Saha and Darnton, 2005).

TECHNOLOGY PERFORMANCE AND ENVIRONMENTAL PERSPECTIVE We begin by discussing performance measurements, specifically by addressing the interrelationship between technology and environmental sustainability. The World Commission of Environmental and Development defines sustainability as “economic development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs”. Hart (1995) noted previously that the concept of the environment in management theory emphasizes political, economic, social and technological aspects, but frequently neglects the natural environment. Rasanen et al. (1994) also showed that the greening of industry can involve any fundamental change in the managerial logic of action. Moreover, Garrod and Chadwick (1996) determined that some firms have adopted environmental management tools only to the extent that such a strategy will enable the firms to pursue more effectively their profit-centered approach. Also, while the companies decided to invest in environmental technology to comply with government regulations, they also need to spend and allocate their budget into a range of cost (Jaffe et al., 1995), such as: governmental administration of environmental costs (statutes and regulations, monitoring, and enforcement), private sector compliance expenditures (capital and operating), other direct costs (legal and other transactional, shifted management focus, disrupted production), negative costs (natural resource inputs, worker health, and innovation stimulation), general equilibrium effects (product substitution, discouraged investment, retarded innovation), transaction costs (unemployment, obsolete capital), and social


Table 3. Comparison of Strategic BSC, IT BSC, and Green IT BSC Balanced Scorecard for Strategic Management (Kaplan and Norton 1996)

Balanced scorecard for strategic IT management (Van Grembergen 2000)

Green IT Balanced scorecard

Financial perspective Mission: To succeed financially, how should we appear to our shareholders?

Business contribution Mission: to obtain a reasonable business contribution of IT investments

Financial Perspective Mission: What are the contributions of the Green IT implementations from financial perspective?

Customer perspective Mission: To achieve our vision, how should we appear to our customer?

User Orientation Mission: to be the preferred supplier of information system

Stakeholder Orientation Mission: Does Green IT efficiently and effectively support stakeholders’ needs?

Learning and Growth Mission: To achieve our vision, how will we sustain our ability to change and improve?

Future Orientation Mission: to develop opportunity to answer future challenges

Future Orientation Mission: Is Green IT flexible enough to integrate future change?

Internal business process Mission: To satisfy our shareholders and customers, at what business processes must we excel?

Operational Excellence Mission: to deliver effective and efficient IT applications and services

Process Perspective Mission: How effective and efficient is the Green IT during its lifecycle?

impacts (loss of middle-class jobs, economic security impacts). To improve performance, top-level management has recognized that it is necessary to better understand the drivers of both costs and revenues and the actions they can take to affect them (Epstein and Roy, 2001). Several questions that must be addressed before investing in environmental technology are: 1. How can top management get their investment on environmental technologies to return some business value to them? 2. How does top management ensure that investments in environmental technologies are the right decision, not only to comply with government regulations, but also to achieve and transform those investments into competitive advantage? 3. How does top management control the firm’s environmental technology investments? Certainly, the effort to invest in environmental technology and the decision to include environmental aspects into companies’ strategies requires fundamental changes from the perspective of IT governance. In comparison to strategic BSC and IT

BSC, Green IT BSC emphasizes the environmental aspects of IT along with the financial perspective, stakeholder orientation, future orientation, and operational excellence (Table 3). We need to acknowledge that linking measurements to strategy is at the heart of the success of the scorecard development process (Kaplan and Norton, 1993). The adoption of the original IT balanced scorecard to measure the benefits generated from emerging environmental aspects into companies’ strategies may help companies to attain competitive advantage (See Figure 1). As a technological assessment, our Green IT scorecard evaluates environmental risks, the impacts of specific projects and facilities, the potential for effluents, releases, and hazardous wastes, and the product life cycle costs of technology (Shrivastava 1995). Additionally, similarly to other BSCs, each perspective must be translated into corresponding metrics and measures for the evaluation of the current situation. The relationship between the IT scorecard and the sustainable business scorecard is shown in Figure 2. Although we adopted the cascade concept of IT BSC, the flow- process of its formulation is relatively different. Unlike the traditional balanced scorecard cascade (Van Grembergen, 2000), we

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Figure 1. Green IT Balanced Scorecard

conceptualized the “sustainability scorecard structure” derived from three components of Green IT’s competitive advantages--that is, the Green IT infrastructure scorecard and Green IT usage scorecard functioned as the enablers of the Green IT Strategic scorecard; this strategic scorecard, in turn, functions as the driver of the sustainability business scorecard. Figure 2. Sustainability Scorecard Structure

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MEASURING GREEN IT SCORECARD (ENVIRONMENT AS THE CORE PERSPECTIVE) Process Perspective The process perspective represents the process by which Green IT can be used to create and deliver support to applications in a sustainable fashion. An important focus of environmental technologies is to improve the ecological performance of manufacturing processes. This can be achieved via the redesign of production systems to reduce environmental impacts, the use of cleaner technologies, the use of higher-efficiency production techniques, minimizing waste at its source, and maximizing fuel and energy efficiency (Shrivastava, 1995). Hence, the process perspective focuses on the operational process of technology used to satisfy environmental expectations. We adopted the Life Cycle Approach to obtain the entire picture of Green IT from the process perspective. A


Figure 3. Stages of the product life cycle-Australian Government: Department of the Environment and Heritage (Adapted from UNEP, 2005)

life cycle approach means that we recognize how companies’choices influence what happens at each of these points so they can balance trade-offs and positively impact the economy, the environment, and society (UNEP1, 2004). It identifies both the opportunities and risks of a product or technology, all the way from raw materials to disposal. “Life Cycle Approaches help us to find ways to generate the energy we need without depleting the source of that energy and without releasing greenhouse gases that contribute to climate change.” (UNEP 2004, p.5) The Life Cycle Approach is a powerful tool to help companies’ better understand the environmental effects of their technology usage, thus providing valuable information regarding opportunities to improve environmental performance (Hendrickson et al., 1998). LCA is also, next to other tools, critical for technology choices, setting technologies into a product-related chain perspective (UNEP, 2005). The LCA assesses the environmental impacts of a system or product from cradle to grave throughout the full life cycle, from

the exploration and supply of materials and fuels, to the production and operation of the investigated objects, to their disposal/recycling (Pehnt, 2006). This approach focuses first and foremost on (1) compiling an inventory of relevant energy and material inputs and environmental releases; (2) evaluating the potential environmental impacts associated with the identified inputs and releases, and; (3) interpreting the results to assist companies in making more informed decisions (EPA, 2010). A life cycle approach is generally decomposed into several stages (see figure 3), and most commonly into six stages: (1) product design; (2) raw material extraction and processing; (3) manufacture of the product; (4) packaging and distribution to the customer; (5) product use and maintenance; (6) end-of-life management: reuse, recycling, and disposal (EPA, 2010). We developed our process perspective metric via derivation from the Life-Cycle Approach, focusing on the key issue as to “How effective and efficient is Green IT during its life-cycle?” The process metric is illustrated in Table 4. The

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Table 4. Metric for Process Perspective Process Perspective

Perspective Key Question

How effective and efficient is the Green IT during its life-cycle?

Objectives

Reduce the amount of technology pollution/carbon footprint/GHG emission for conducting the operational process Measures • Pollution control index • Transportation efficiency assessment • Emission ratio • Corporate report (ISO14001, GRI, or EMAS version) Decrease the consumption of energy and resources for conducting the operational process Measures • Management system project scores • Corporate report (ISO14001, GRI, or EMAS version) • Average consumption of water, materials, energy Minimize the environment-related risks Measures • Hazardous waste ratings • Risk technology assessment • Corporate report (ISO14001, GRI, or EMAS version) • Environmental impact assessment Easy to recycle, reuse, and decompose at the end of technology life-cycle Measures • Life-cycle assessment • Material investigation • e-waste ratio • Corporate report (ISO14001, GRI, or EMAS version)

principal issues here are as follows: reducing the quantity of technology pollution/carbon footprint/ Green house gases (GHG) emissions for conducting the operational process, decreasing the consumption of energy and resources inherent to the operational process, minimizing environmentrelated risks, and adopting technologies that are easy to recycle, reuse, and decompose at the end of the technology life-cycle. The first objective can be measured by calculating the pollution control index, transportation efficiency assessment, emission ratio, and corporate report (ISO14001, GRI2, or EMAS3 version). The energy consumption and resources may be measurable via the management system project score, average consumption of water, materials, energy, and corporate report (ISO14001, GRI, or EMAS version). The third objective, minimizing the environment-associated risks, can be evaluated through hazardous waste ratings, risk technology assessments, and corporate reports. The final

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objective, related to end-of-life products, can be measured via life cycle assessments, material investigations, e-waste ratios, and corporate reports.

Stakeholder Perspective The stakeholder perspective represents stakeholders’ evaluation of Green IT. Our Green IT balanced scorecard showed that stakeholders perform a pivotal role in the green business environment. Many surveys have indicates that stakeholders’ growing interest in the natural environment, and have provided clear evidence for popular environmental demands on business firms. Funk (2003) reported that “Companies that actively manage a wide range of sustainability indicators are better able to create long-term value for all stakeholders” (Funk, 2003, p. 1). Thus, stakeholder reactions are a crucial element, as they may affect short-term revenues and costs


Figure 4. Linkage of Stakeholders into Economic Indicators

and long-term corporate performance on many levels (Epstein and Roy, 2001). Hendriques and Sadorsky (1999) identified four categories of stakeholders from an environmental perspective: (1) regulatory stakeholders (governments, trade associations, informal networks, and leading firms in environmental matters); (2) organizational stakeholders (customers, suppliers, employees, and shareholders); (3) community stakeholders (community groups, environmental organizations, and other potential lobbies); (4) the media (mass media). Furthermore, Buysse and Verbeke (2003) re-conceptualized these classifications into regulatory stakeholders (national and regional governments, local public agencies); external primary stakeholders (customers and suppliers); internal primary stakeholders (employees, shareholders, and financial institutions); and secondary stakeholders (rivals, international agreements, environmental non-government organizations,

and the media). In this study, to determine the state of the Green IT balanced scorecard, we adopted four major stakeholders’ groups as proposed by Buysse and Verbeke (2003), and these can be seen in Figure 4. Companies may gain lasting advantage via stakeholder relationships that are uniquely structured to provide strategic advantage. For instance, customers can provide this advantage through loyalty and a long-term stream of green product/ service purchases; employees can do the same by committing to excellent service, innovation, and reliability; shareholders provide a persistent advantage when they provide long-term, patient capital; additionally, partnerships between business and environmental groups can constitute strategies for the integration of corporate environmental strategies with market objectives (Hartman and Stafford, 1997). As stakeholder relationships have already been established as one

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major driver of strategic success, companies must clearly identify key stakeholder groups (Epstein and Roy, 2001). However, it should be noted that a well-prepared organization operating within a business environment that is insensitive to environmental progress will find its financial performance lower than it would be if customers, suppliers, and regulators actively supported environmental advances (Aragon-Correa and Rubio-Lopez, 2007). A range of key questions related to stakeholders and corporate strategies are as follows (Bremser and Chung, 2005): 1. Stakeholder satisfaction: Who are the key stakeholders and what do they need? 2. Strategies: What strategies do we need to implement to satisfy the wants and needs of these key stakeholders? 3. Processes: What critical processes are required if we are to execute these strategies? 4. Capabilities: What capabilities do we need to operate and enhance these processes? 5. Stakeholder Contribution: What contributions do we require from our stakeholders if we are to maintain and develop these capabilities? The objectives of stakeholders’ orientations are stakeholders’ satisfaction, measurement of stakeholders’ needs, and ethical and legacy systems (table 5). Stakeholders’ satisfaction can be measured through surveys of stakeholder satisfaction and the number of stakeholder complaints, while stakeholders’ needs can be evaluated in terms of numbers of meetings with stakeholders, numbers of IT projects with SLA (Service Level Agreement), level of communication between CIO (Chief Information Officer), CEO (Chief Executive Officer), and key stakeholders, and capital accessibility. Finally, ethical and legal mitigation might be assessed in terms of the availability of formal environmental technology

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Table 5. Metrics for Stakeholders Orientation Perspective

Stakeholders Orientation

Key Question

Does Green IT efficiently support stakeholders’ needs?

Objectives

Stakeholders Satisfaction Measures • Stakeholder satisfaction survey • Number of stakeholder’s complaint Management of stakeholders’ needs Measures • Number of meeting with stakeholders • Number of IT project with SLA • Level of communication between CIO, CEO, and key stakeholders • Capital accessibility Ethical and legal mitigation Measures • The availability of formal environmental technology procedures • Number of IT environmental award • Sustainability performance record

procedures, numbers of IT environmental awards, and sustainability performance record.

Financial Perspective Related to stakeholder perspective, Green IT implementation also contributes to the creation of costs (tangible and intangible). The financial perspective of the Green IT balanced-scorecard indicates the contribution of the implementation of green technology from a financial perspective. It represents released business costs and values created via Green IT investment. The environmental dimension can naturally be considered in corporate sustainability development and is normally perceived as a cost for firms (Viederman, 1993). When companies decide to integrate environmental management into their business processes, certain resources and capabilities can be exploited within the organization (Claver et al., 2007). On the other hand, environmental management has also been recognized as a significant factor in determining a firm’s economic performance (e.g. Crissmann, 2000). Thus, managers are faced with a number of trade-offs, and should recognize both


the long-term and short-term costs and benefits of adopting alternative environmental strategies (Epstein and Roy, 1998). By doing so, the explicit costs of environmental management are minimized and can generate other management benefits, including higher morale and increased productivity, thereby resulting in revenue growth (McGuire et al. 1988). Another argument holds that the financial performance of a firm is influenced by strong environmental performance via both market and cost pathways. From the marketing perspective, customers tend to prefer environmentally oriented companies. On the cost side, firms that invest heavily in environmental management systems and safeguards may potentially avoid environmental spills, crises, and liabilities in the future. Costs due to material waste and inefficient process are also minimized (Klassen and McLaughlin, 1996). More comprehensive approaches to environmental management that take into account the environmental impacts of firms’ operations throughout the entire life-cycle of the firm’s products can also contribute to these cost advantages. Moreover, such innovations (e.g. potential liability costs, legal fees, and potential product take-back costs) can also mitigate the environmental costs to some degree. Environmental management practices such as pollution prevention technologies and environmental technological innovations may reduce cycle time, and cut emissions well below the required levels, thereby resulting in compliance and liability costs (Christmann, 2000). This perspective is represented by some five objectives (see table 6): (1) increase the revenue growth via Green IT implementation (measured through actual cost versus budgeted expenses and cost recovery versus expense); (2) reduce the environmental risk cost (measured through the average of risk costs); (3) determine the business value of Green IT Project (computed through financial traditional measurement (e.g. ROI (Return on Investment), ROE (Return on Equity), ROA (Return on Assets)), (New) Infor-

Table 6. Metrics for Financial Perspective Perspective

Financial Perspective

Key Question

What are the contributions of the Green IT implementation from financial perspective?

Objectives

Increase the revenue growth through Green IT implementation Measures • Actual cost versus budgeted expenses • Cost recovery versus expense Reduce environmental risk costs Measures • Average of risk costs Business value of Green IT Project24 Measures • Financial traditional measurement (e.g. ROI, ROE, ROA) • (New) Information Economics • Costs/Benefits Analysis Management of Green IT investment Measures • Capital investment rate Reduce the e-waste cost Measures • Average of recycle and take-back costs

mation Economics, or cost/benefit analyses); (4) management of Green IT investment (measured via capital investment rate); and (5) reduce the e-waste costs (evaluated through the average of recycle and take-back costs).

Future Orientation Future orientation involves the resources and capabilities required by IT to sustainably deliver its services. As we previously asserted, businesses can increase the productivity of their resources via green innovations (eco-innovations). Innovations can be viewed as repurposing, improving, or renewing existing ideas and practices that need to be understood, particularly the correspondence between new technology ideas and corresponding new practices (Hines and Marin, 2004). In accordance with this concept, eco-innovation has been broadly defined as the process of developing new ideas, behaviors, products, and processes that contribute to a reduction in environmental

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Table 7. Metrics for Future Orientation Future Orientation

Perspective Key Question

Is Green IT flexible enough to integrate the future challenges?

Objectives

R&D of Green IT Measures • Number of new innovation • Number of patent • Percentage of budget allocated to new research and development Increase the degree of green commitment and motivation within the organization Measures • Employees’ green satisfaction index • Number of IT environmental certificates • Internal process improvement Improve the accessibility of green technology related knowledge from outside Measures • Number of cooperation with local/international environmental association (e.g. ISO, RoHS, etc.) • Number of trainings related to green technology usage

burdens or to ecologically specified sustainability targets (Rennings, 2000). This eco-innovation has become the first listed target of companies wishing to sustain their competitive advantage in the future, and can be implemented in terms of product, resource, production process, equipment, waste, and pollution innovations, by embedding technology into those processes (Sarmento et al., 2007). Green innovations (eco-innovations) consist of hardware or software innovations associated with green products or processes, including innovations in technologies involved in energy conservation, energy alternative research, pollution prevention, waste recycling, green product designs, or corporate environmental management (Hart, 1995). Radical innovation is necessary, which is where technological products and systems are reconstructed drastically in order to facilitate a radical upward system shift in eco-efficiency (Hellstrom, 2007). To address the prospect of innovation, the principal objectives of this orientation are as follows: (1) research and development of Green IT (measured through number of new innovation, number of patents, and percentage of budget allocated to new research and development); (2) increase the degree of green commitment and motivation

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internal to the organization (measured through employees’ green satisfaction survey, number of IT environmental certificates, and internal process improvement); (3) improve the accessibility of green technology-related knowledge from outside (measured by the number of corporations with local/international environmental associations (e.g. ISO, RoHS (Restriction of Hazardous Substance), etc.) and amount of training related to green IT usage). The metric for future orientation is illustrated in table 7.

CAUSE-AND-EFFECT RELATIONSHIPS In the balanced scorecard model, strategy maps are utilized to communicate the hypothesized causeeffect linkages between performance measures and strategic objectives (Herath et al., 2010). In Figure 5, the concept of the strategic map of Green IT BSC (cause-and-effect relationship) is illustrated. These cause-and-effect relationships need to be defined throughout the entire scorecard (Van Grembergen, 2000). By systematically investigating the leading and lagging indicators from a top-down perspective, the interconnections of each


Figure 5. Concept for the Strategic Map of Green IT BSC

perspective may indicate the strategic relevance of the environmental aspects of technology. For example, if Research and Development (R&D) into Green IT is increased, the amount of technology pollution/carbon footprint/GHG emissions will be reduced; this may ultimately lead to improved customer satisfaction as an enabler of business value of Green IT projects and revenue growth.

SOLUTIONS AND RECOMMENDATIONS In this study, we recommend a relevant strategic management tool for the evaluation of Green IT investments from four perspectives (stakeholders’ orientation, operational excellence, financial perspective, and future orientation) derived from an environmental standpoint. The process of for-

mulating this Green IT BSC as described herein indicates the manner in which the environmental issue can be integrated into technology management, which can, in turn, be used to support the decision-making process. The metrics, as a component of this Green IT BSC, are essential not only for determining the status of the entity at the present time, but also for monitoring its risks associated with conducting business in a dynamic environment (Srivastava et al. 2001). Furthermore, we have proposed a new structural model of Green IT BSC, consisting of the Green IT infrastructure BSC and the Green IT usage BSC as the enablers of the Green IT strategic BSC; this Green IT strategic BSC is an enabler of sustainable business BSC. For the successful implementation of this scorecard, we have provided a range of recommendations for both practitioners and researchers, as follows.

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Similarly to the other IT balanced scorecard, Green IT BSC is a technique that can only prove successful when the business and the IT work together and collaborate in the scorecard measurement process. The introduction of an IT balanced scorecard in an IT environment with poor management and IT practices is too large a challenge (Van Grembergen et al., 2003). In addition to this first requirement, we recommend that the stakeholders be involved in the measurement process. Thus, the existence of solid collaboration among IT, business units, and related stakeholders may enhance the accuracy and reliability of Green IT BSC. In relation to the first recommendation, it is necessary to identify the key stakeholders necessary for success in sustainable environmental and business. The companies may conduct a forum dialogue with key stakeholders in order to understand their perspectives and priorities regarding environmental sustainability, and their viewpoint on this issue is likely to affect business sustainability. It is also recommended that companies incorporate this strategic tool into other environmental management systems such as ISO14000 and LCA. While currently existing environmental management systems represent only the detailed environmental factors of business, the Green IT BSC protocol has the ability to integrate both the intangible and tangible environmental aspects of business. We suggest that IT management should focus on implementing Green IT BSC in every investment into environmental technology. This strategic tool should be applicable to the evaluation of various forms of technology (e.g. software, hardware, or service) that might help management to make the appropriate financial decisions.

•

•

A broader perception throughout the entirety of management--such as the inculcation of pro-environmental attitudes--is necessary, particularly in the process of aligning performance drivers and performance outcomes of Green IT BSC. Finally, we recommend that top management become as familiar as possible with green business strategies and practices; therefore, Green IT BSC is expected to prove a useful tool for the integration of sustainable business strategies with green technology strategies.

FUTURE RESEARCH DIRECTIONS This study has some limitations that should be overcome by adopting the appropriate research directions in the future. First, our study was designed as a conceptual study. We recommended a new model as a strategic management system for firms’ IT departments. Thus, more effort will be necessary in order to validate the implementation of this Green IT Balanced Scorecard in cases of actual businesses, and to evaluate it as a component of IT governance. Second, despite the fact that we generate the structure of Green IT BSC, consisting of Green IT infrastructure BSC, Green IT Usage BSC, and Green IT Strategic BSC as the enablers of sustainability BSC, the classification metrics could likely be enhanced in the future. Thus, further research will also be necessary in order to classify our standard metrics of Green IT BSC into certain categories of the structure model. Moreover, further study including the specific measures is also necessary to adequately address this phenomenon. Third, the weights of the metrics might be affected to some degree by the companies’ primary orientation and initial business type. Determining the weights on the basis of the importance and potential impact of each green technology device might result in some interesting and valuable results. Further research


will be necessary to address this issue by comparing the evaluation results across different business settings. Finally, our study is only a technique by which business strategies and IT strategies are aligned. Among the currently available measurement tools, it is somewhat difficult to judge which method is superior, since each method has its own distinctive objectives and characteristics. This study can be viewed as an advanced step in the development of IT strategic management tools designed to enhance the concept of environmental sustainability.

CONCLUSION The objectives of the Green IT balanced scorecard are to evaluate technology performance by integrating environmental aspects effectively, to investigate both the tangible and intangible assets of Green IT investment, and to align IT performance and business performance and transform the results into competitive advantage. The transformation of existing technology by green technology is associated with high risk, and thus must be carefully considered. To address this situation, our conceptual model should be considered a systematic set of guidelines to ensure a strategic alignment of Green IT and to achieve integration between sustainable business and technology. This integration concept offers a new possibility for both practitioners and researchers to translate their sustainable business strategies into Green IT actions.

Aragon-Correa, J. A., & Rubio-Lopez, E. A. (2007). Proactive corporate environmental strategies: Myths and misunderstandings. Long Range Planning, 40, 357–381. doi:10.1016/j. lrp.2007.02.008 Bieker, T. (2003). Sustainability management with the balanced scorecard. Paper presented at Corporate Sustainability, 5th International Summer Academy on technology Studies, Deutschlandsberg, Austria. Bremser, W. G., & Chung, Q. B. (2005). A framework for performance measurement in the e-business environment. Electronic Commerce Research and Applications, 4, 395–412. doi:10.1016/j.elerap.2005.07.001 Brewton, J. (2004). How can we use a scorecard to maximize our CRM performance? CRM Magazine. Retrieved February 26, 2010, from http:// www.destinationcrm.com/articles/default.asp?A rticleID=3689&KeyWords=balanced Buysse, K., & Verbeke, A. (2003). Proactive environmental strategies: A stakeholder management perspective. Strategic Management Journal, 24, 453–470. doi:10.1002/smj.299 Carmona-Moreno, E., Cespedes-Lorente, J., & de Burgos-Jimenez, J. (2004). Environmental strategies in Spanish hotels: Contextual factors and performance. The Service Industries Journal, 24(3), 101–130. doi:10.1080/0264206042000247786

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Watson, R. T., Boudreau, M.-C., & Chen, A. J. (2010). Information Systems and environmentally sustainable development: Energy informatics and new directions for the IS community. Management Information Systems Quarterly, 34(1), 23–38.

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ADDITIONAL READING Bremser, Wayne G., Q. B. Chung. (2005). A framework for performance measurement in the e-business environment. Electronic Commerce Research and Applications, 4, 395–412. doi:10.1016/j.elerap.2005.07.001 Cobit (2000). 3rd Edition Framework. Released by the COBIT steering committee and IT Government Institute. De Haes, Steven, Wim Van Grembergen. (2004). IT governance and its mechanism. Information system control journal, 1, 1-8. De Haes, Steven, Wim Van Grembergen. (2008). Practices in IT governance and Business/IT alignment. Information system control journal, 2, 1-6 EPA. Life-Cycle Assessment (LCA). Environmental Policy Agency. Retrieved February 26 2010, from http://www.epa.gov/ord/NRMRL/lcaccess/ Epstein, M. J., & Rejc, A. (2005). How to measure and improve the value of IT. Strategic Finance, 87(4), 34–41.

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Kaplan, R. S., David P. Norton. (Jan-Feb 1996). Using the balanced scorecard as a strategic management system. Harvard Business Review. Laurinkeviit, A., Kinderyt, L., & Stasikien, A. (2008). Corporate Decision-Making in Furniture Industry: Weight of EMA and a Sustainability Balanced Scorecard. Environmental Research. Engineering and Management, 1(43), 69–79. Martinsons, M., Davison, R., & Tse, D. (1999, February). The Balanced Scorecard: A Foundation for the Strategic Management of Information Systems. Decision Support Systems, 25(1), 71–88. doi:10.1016/S0167-9236(98)00086-4 Molla, A., & Vanessa A Cooper, S. P. (2009). IT and eco-sustainability: developing and validating Green IT Readiness Model. Paper presented at ICIS 2009, Phoenix, Arizona. Oh, W., & Pinsonneault, A. (2007). On the assessment of the strategic value of information technologies: conceptual and analytical approaches. Management Information Systems Quarterly, 31(2), 239–265. Rosemann, M. (2001). Evaluating the Management of Enterprise Systems with the Balanced Scorecard. In Van Grembergen, W. (Ed.), Information Technology Evaluation Methods And Management (pp. 171–184). Hershey, USA: Idea Group Publishing. doi:10.4018/9781878289902.ch011


Sambamurthy, V., & Robert, W. Zmud. (1999). Arrangements for information technology governance: a theory of multiple contingencies. Management Information Systems Quarterly, 23(2), 261–290. doi:10.2307/249754 Shrivastava, P. (1995). Environmental technologies and competitive advantage. Journal of Strategic Management, 16, 20–83. Sixma. (2006). The Sigma guidelines - toolkit. Sustainability scorecard. 2001-2006 SIGMA Project. Retrieved February 10 2010, from http:// www.projectsigma.co.uk UNEP. (2004). Why take A Life Cycle Approach?United Nations Publication. UNEP. (2005). Life Cycle Approaches, The road from analysis to practice. UNEP/SETAC Life Cycle Initiative. United Nations Publication. Van Grembergen, W. (2000). The balanced scorecard and IT governance. Information Systems control journal, 2. Van Grembergen, W., Steven De Haes. (2005). Measuring and improving IT governance through the balanced scorecard. Information system control journal, 2. Van Grembergen, W., R. Saull, S. De Haes. (2003). Linking the IT Balanced Scorecard to the Business Objectives at a Major Canadian Financial Group. Journal of Information Technology Cases and Applications. Van Grembergen, W., & Timmerman, D. (May 1998). Monitoring the IT process through the balanced score card. Paper presented at the 9th Information Resources Management (IRMA) International Conference, Boston.

Watson, R. T., Boudreau, M.-C., & Chen, A. J. (2010, March). Information systems and environmentally sustainable development: energy informatics and new directions for the IS community. Management Information Systems Quarterly, 34(1), 23–38. Weill, P. (2004). Don’t Just Lead Govern: How Top-Performing Firms Govern IT. MIS Quarterly Executive, 1(3), 1–17.

KEY TERMS AND DEFINITIONS Green IT: Any computer-based tools (hardware, software, equipments), mechanisms, structures, guidelines, and methodologies resulting from environmental breakthroughs at each stage of the technology’s life-cycle, including use, design, manufacture, and reuse, refurbishing, and disposal of technology in environmentally sound manners (to deliver sustainable values for business, environment, and society, and at the same time, improve the quality of life). IT Governance: The organizational ability to provide a systematic framework for the decision-making process during the formulation and implementation of IT strategy as a direction toward the achievement of competitive advantage for a corporation. Green IT Balanced Scorecard: A nomological management tool to systematically align IT strategy with business strategy from an environmental sustainability perspective in order to achieve competitive advantage. Process Perspective: Process perspective represents Green IT process to create and deliver support to the applications sustainably. Stakeholders’ Perspective: Stakeholder perspective represents stakeholder evaluation of Green IT.

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Financial Perspective: Financial perspective represents the contribution of the green technology implementation from financial perspective. Future Orientation: Future orientation represents resources and capabilities needed by IT to deliver its service sustainably.

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ENDNOTES 3 4 1 2

United Nations Environmental Program. Global Reporting Index. Eco-Management and Audit Scheme. Adapted from Van Grembergen (2000).

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Chapter 8

A New Recommendation for Green IT Strategies: A Resource-Based Perspective Yulia Wati Chosun University, South Korea Chulmo Koo Chosun University, South Korea

ABSTRACT Incorporating the natural environment as a strategic focus has recently been recognized as a possible source of competitive advantage. In this regard, green IT provides an opportunity for companies to tackle the environmental issue, and simultaneously serves as a source of competitive advantage. However, the field of green IT strategy, from the perspective of environmental management, remains limited by its distinct lack of a theoretical framework and straightforward definitions. In this conceptual study, we proposed “green IT strategies” based on a resource-based perspective by incorporating modern institutional theory into a strategic formulation. This chapter conceptualizes three different strategies: tactical green IT strategy, strategic proactive green IT strategy, and sustained green IT strategy, along with theory-based propositions for each of the strategies. The chapter also demonstrates that the Green IT strategy is path-dependent; that is to say, a firm’s prior experience and history helps determine its current strategies. This study also involves a discussion of the development of the theory, the proposed model, and some possible future research directions.

INTRODUCTION Information Technology (IT) has enabled significant improvements in the standard of living. DOI: 10.4018/978-1-60960-531-5.ch008

However, the production, purchase, use, and disposal of electronic products can also exert significantly negative environmental impacts (EPEAT, 2008). This indicates that changes in the natural environment may be viewed as inevitable


A New Recommendation for Green IT Strategies

consequences of economic activity, which require firms to evolve (Faber, 1998). According to the current research conducted by Gartner, ICT is responsible for approximately 2% of global CO2 emissions, and can also contribute significantly to the control and reduction (up to 98%) of CO2 emissions associated with other activities and industries (Mingay, 2007). The trend of “greening” IT products, applications, services, and practices will probably pose a continuous concern, as the Green IT strategy provides opportunities to tackle environmental issues (Vykoukal et al., 2009). In response to this issue, many businesses are altering their practices in order to become more environmentally responsible (Hendry and Vesilind, 2005). Considering renewable energy technologies and efficient energy utilization as the most effective potential solutions to current environmental issues (e.g. Hollander and Schneider, 1996; Lee et al., 1992), firms are finding it increasingly necessary to select the appropriate strategies to address this issue. Because little research has been conducted thus far on Green IT from a strategic management perspective, in this study we have conceptually described and recommended a novel set of Green IT strategies driven from the resourcebased view perspective, by incorporating modern institutional theory into the strategic formulations. “Environmental management is necessary, urgent, and can often be profitable” (Aragon-Correa and Rubio-Lopez, 2007, p.359).

BACKGROUND Over the past 20 years, the literature regarding strategy has developed into two main guru theories: the resource-based view theorists focus on the valuable resources required for the sustenance of competitive advantage, and the Porterians emphasize the discovery and exploitation of market opportunities (Miller, 2003). However, one major limitation of both of these prior theories is that they

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do not consider natural environmental aspects in their strategic formulations (Hart, 1995). On the other hand, previous research has demonstrated that competition via innovation and firm performance is compatible with and can be enhanced by proper environmental management (Crowe and Brennan, 2007). Thus, managers who wish to secure the continuity and profitability of their business must deal proficiently with forthcoming environmental developments that have yet to achieve the status of a decision event (Dutton and Duncan, 1987). Incorporating the natural environment as a strategic focus is considered by some to be a source of, rather than a threat to, competitive advantage (Hart 1995; Porter and van der Linde 1995). The implementation of environmental practices has been extensively evaluated and such factors of environmental legislation, the rising cost of waste disposal, corporate images, and public perception collectively constitute a further impetus for green initiatives (Shrivastava, 1995); however, thus far, only limited efforts have been made to systematically clarify these practices and to gain insight into the manner in which they can contribute to a favorable competitive position (Lucas, 2009). Researchers concerned with environmental responsiveness have attempted to determine the rationales underlying the responses of firms to environmental issues (e.g. Bansal and Roth, 2000; Hoffman, 2001; Hunt and Auster, 1990; Sharma et al., 1999; Paulraj, 2008). However, the field of strategic IT from the perspective of environmental management continues to suffer from a distinct lack of a theoretical framework and straightforward definitions (Lucas, 2009). In this regard, we have conceptually divorced the technological issue (to which we refer herein as “Green IT”) from the environmental issue. Whereas the environmental issue emphasizes the totality of the organization’s actions toward the environment (Sharma et al., 1999), Green IT tends to focus principally on environmentally technological practices (Mingay, 2007). Consistent with the


previous concepts, green IT offerings address the information technology function/industry, which plays a role in reducing the environmental burdens posed by IT and also serves to provide advanced technology and solutions for the mitigation of environmental problems (O’Flynn, 2009). From this perspective, the implementation of environmental responsibility—which includes the generation of practical and sustainable information systems--is rapidly becoming a core element of organizations’ social and regulatory operating licensing standards. However, the concept of Green IT itself, from the Information Systems perspective, still needs to be empirically investigated (Hasan et al., 2009). The majority of the literature regarding ICT environmental sustainability comes from environmental groups, practitioners, and governmental bodies (Elliot and Binney, 2008). IS researchers have yet to engage fully with this hot topic, while business organizations are confronted by the necessity of transforming their current business activities into more environmentally sustainable ones, but remain uncertain as to how to effect that transformation (Elliot and Binney, 2008). Progress in the Green IT research field requires theorization, model construction, and measurement development (Hair et al., 2006). Therefore, in order to flesh out more thoroughly the concept of green IT practices, we focused our current study on the various dimensions of theories concerning green IT practices, and recommended different institutional levels of Green IT strategies from a resource-based view perspective. This paper is organized as follows. In the next section, we present the theory of the resourcebased view of the firm, followed by natural resource-based view theory, environmental strategies, and institutional theory, as elucidated in previous studies. Relying on these existing theories, we posited a new set of Green IT strategic recommendations, including some theoretical propositions to enhance the concept. In the final section, we discuss some implications for future

research, in addition to some of the limitations of the present study.

RESOURCE-BASED VIEW OF THE FIRM Resource-based view theory holds that, because resources are heterogeneous among firms and imperfectly mobile across firms, differences in resource endowments may arise and persist over time (Barney, 1991). This theory is primarily employed in the literature concerning strategic management, and has also been adopted in management information system research (Priem and Butler, 2001). For example, it has been used to measure discrepancies in IS resource performance (Teng et al., 1995), link IT capability with firm performance (Bharadwaj, 2000), and evaluate the importance of senior leadership and infrastructures to IT assimilation (Kearns and Lederer, 2003). Some previous researchers have asserted that the resource-based theory (Barney, 1991) and its extensions (e.g. Hart, 1995; Teece et al., 1999), with their focus on firm resources and capabilities (Grant, 1991), provide an appropriate theoretical lens by which it can be determined how factors internal to the firm can serve as a source of competitive advantage (Ravichandran and Lertwongsatien, 2005). Resources can be defined as those assets that are linked semi-permanently to the firm (Wernerfelt, 1984), whereas capabilities refer to skills predicated in human competencies (Markides and Williamson, 1996). Resources can affect a variety of the actions taken by top management and improve financial performance (Wernerfelt, 1984). If these resources culminate in a marketplace advantage that cannot be readily duplicated, then they must be considered potential sources of competitive advantage (Kearns and Lederer, 2003). In other words, to function as a source of persistent above-average performance, resources must meet the following three criteria: they must be (1) valuable, mean-

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ing buyers are willing to purchase the resources’ outputs at prices significantly above their price; (2) rare, such that the buyers cannot turn to competitors for the same or substitute resources; and (3) imperfectly imitable, such that it is difficult for a competitor to imitate or purchase the resource (Barney, 1991). Resources that are rare, difficult to imitate, and valuable in a given industry are referred to as “strategic resources” (Chi, 1994). Internal resources can be divided into four categories: physical, human, social, and organizational capital resources (Lucas, 2009). Physical capital includes the technological artifacts utilized in a firm, a firm’s plant and equipment, and the firm’s geographic location (Barney 1991), whereas human capital encompasses individual employee’s knowledge, skills, and abilities. Social capital refers to the knowledge embedded in groups and networks of people; and organizational capital includes institutionalized knowledge and codified experience stored in databases, routines, patents, manuals, structures and so forth (Lucas, 2009). Capabilities are also identified as repeatable, rule-guided patterns of action in the use of assets to create, manufacture, and provide products or services to a market (Sanchez et al., 1996). Capabilities adapt, integrate, and reconfigure internal and external organizational skills to match the requirements of a changing environment (Teece et al., 1997). Helfat and Peteraf (2003) divided capabilities into two categories: operational and dynamic. Operational capability is defined as a high-level routine that, together with its implementing input flows, confers upon the management of an organization a set of decision options for the production of significant outputs of a particular type, whereas dynamic capabilities construct, integrate, or reconfigure operational capabilities. According to Barney (1991), resources that are valuable but common can only function as sources of competitive parity; resources that are valuable and rare can serve as sources of temporary competitive advantage; and resources that are valuable, rare, and costly or difficult to imitate

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Figure 1. Barney (1991)’s Resource-based view of the firm

are potential sources of sustainable competitive advantage (Barney 1991). Valuable resources can be utilized to exploit opportunities and or neutralize threats in a firm’s environment. Rare resources are those that are limited in supply and are not equally distributed across a firm’s current and potential competition. Inimitability refers to the extent to which resources are difficult to replicate by other firms. Inimitability may be the consequence of a variety of factors, including social, multicausal, or specific historical circumstances. “Non-substitutability” means that a resource cannot be simply replaced (or substituted) with another one. Thus, if a firm possesses valuable, rare, and sufficiently inimitable IT resources, the application of IT resources to information processes in a firm can generate competitive advantage, even when no other sources are involved in the process (Jeffers et al. 2008). One of the primary critiques of Barney’s (1991) RBV theory is the static nature of the ingredients required for competitive advantage. Mahoney and Pandain have addressed this ambiguity by arguing that a firm may achieve rents not only because it has better resources, but rather because of the firm’s competence in making better use of its resources (Mahoney and Pandain, 1992; Newbert, 2007). Resources also must be exploited for their latent value, including core capabilities, compe-


tencies, combinative capabilities, transformationbased competencies, organizational capabilities, and other capabilities (Newbert, 2007).

Natural Resource-Based View The natural resource-based view was initially introduced in 1995, by Hart. Hart (1995) posited that the constraints imposed by the natural environment would constitute novel challenges and new opportunities for firms, and that the recognition, management, and leveraging of these constraints would result in the achievement of a desirable position. Lucas (2009) suggested two features of resource-based logic to elucidate the relationship between environmental practices and sustained competitive advantage: (1) resources are not economically valuable in isolation, thus, environmental changes may affect the importance of resources to the firm; (2) resources are not productive in and of themselves, but proper exploitation of the appropriate bundles of resources, in consideration of both internal and external constraints, may create superior economic value. With regard to application in the natural environment, firstly, the development of organizational capabilities and resources may be considered to be a function of imperfect or incomplete market factors. Under circumstances of market imperfection, managers, through the decisions they make, alter the nature of competition in markets. The decisions made by managers are linked inextricably to their perceptions regarding the internal characteristics of their own firms and also of the external environment in which they compete (Penrose 1959). From the perspective of the resource-based view, managerial perceptions should be linked to resource functionality, resource recombination, and resource creation. Some have argued that other differences between firms, in addition to differences in firm expectations, such as the factor of the lack of separation (a small number of firms seeking to implement a strategy already control all the necessary resources for its

implementation), uniqueness (a unique history or constellation of other assets); lack of entry due to profit maximization (firm’s expectations regarding the true value of a strategy), financial strength (a firm has sufficient financial backing to enter a strategic factor market and to attempt to acquire the resources necessary for the implementation of a product market strategy), and lack of understanding (the entrants may not understand the return-generating processes underlying a strategy) may create competitive imperfection in a strategic factor market (Barney 1997). Secondly, the adoption of a resource-based view in environmental dynamic terms is the first step in the formulation of a strategic diversification (Helfat and Peteraf, 2003). Teece et al. (1997, p. 516) defined this dynamic capability as the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments. In order to compete in a dynamic environment, Porter and van der Linde (1995) have proposed that innovation is the key strategic factor that must be possessed by the organizations. Resources need to alter the dynamic environment by providing dynamic capabilities (Helfat, 2000). Thus, companies should reconfigure their internal and external capabilities in order to respond to a dynamic environment (Teece et al., 1997). Dynamic capabilities involve adaptation and change, as they are instrumental in building, integrating, or reconfiguring other resources and capabilities (Helfat, 2000).

Environmental Strategy The success of an environmental strategy requires a truly forward-looking approach and a long-term commitment from the firm (Shrivastava, 1995; Hart, 1995). Environmental management is one of the key elements of manufacturing strategy. Crowe and Brennan (2007) previously characterized environmental management as the systematic and strategic inclusion of environmental concerns in manufacturing priorities, improvement goals,

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action programs, and performance improvements. They demonstrated that strategies, management systems, and other factors including firm size, collaboration and networking, industry sectors, R&D intensity, IT and engineering equipment investments, the ability to develop and exploit technological and customer competencies, investments in human and knowledge capabilities, the proportion of specialists employed, and size all functioned as indicators of innovation, performance and environmental management. It has also been argued that a firm that expressly includes environmental issues in its strategies is more likely to be able to exploit some environmental aspects for competitive advantage (Crowe and Brennan, 2007). Previous studies have shown that the patterns of strategic behavior employed by firms to achieve environmental objectives are aligned with the characteristics of the firms’ competitive strategies (e.g. Aragon-Correa, 1998). However, owing to the complexity of environmental issues, technological advances are required for the achievement of sustainable development (York and Rosa, 2003) and innovative firms are expected to lead the way, inspiring a “win–win” condition (Drake et al., 2004). In this vein, innovative companies tend to engage in or adopt new ideas, methods, or behaviors that may result in new products, services, or technological processes (Crowe and Brennan, 2007). Some of the previous relevant literature has categorized environmental strategies from a variety of perspectives. For instance, Hunt and Auster (1990) proposed five categories for environmental strategies: beginner, firefighter, concerned citizen, pragmatist, and proactivist. Roome (1992) also conceptualized five categories of environmental strategies: noncompliance, compliance, compliance plus, commercial and environmental excellence, and leading edge. Hart (1995) delineated three types of resourcebased environmental approaches: the pollution prevention approach, product stewardship, and sustainable development. Henriques and Sador-

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sky (1999) classified their strategies into four categories: reactive strategy, defensive strategy, accommodative strategy, and proactive strategy. Buysse and Verbeke (2003) referred to the study by Hart (1995) and proposed three new groups: reactive strategy, pollution prevention, and environmental leadership. Murillo-Luna et al. (2008) divided proactive strategies into four types of environmental response pattern: passive response, attention to legislation response, attention to stakeholders’ response, and total environmental quality response. The descriptions are illustrated in detail in Table 1.

Institutional Theory and Stakeholders Recent research in institutional theory has assessed the causes of isomorphism, the factors that induce organizations to adopt similar structures, strategies, and processes (DiMaggio and Powell, 1983). The institutional perspective argues that in modern societies in which organizations are typified as systems of rationally ordered rules and activities, organizational practices and policies are readily accepted as legitimate and rational to the extent that they allow for the attainment of organizational goals (Teo et al., 2003). In other words, organizational legitimacy is at the center of this theory (DiMaggio and Powell, 1983), and it assumes that appropriate behavior is necessary for the maintenance of competitive advantage (Scott, 2001). Institutional theory posits that organizations face pressures and must compete for resources, customers, political power, and economic and social fitness in terms of conformity to the shared notions of appropriate forms and behaviors, as violating them may call into question the organization’s legitimacy and thereby affect its ability to secure resources and social support (DiMaggio and Powell, 1983). Organizations are subject to pressures to become isomorphic with their environment, which incorporates both interconnectedness and structural equivalence


Table 1. Prior Categories of Environmental Strategies Author(s) Hunt and Auster (1990)

Roome (1992)

Hart (1995)

Henriques and Sadorksy (1999)

Buysse and Verbeke (2003)

Categories

Descriptions

Beginner

A company tends to cope with environmental concerns either by turning its back on a problem or by adding responsibility to existing positions

Firefighter

A company does not view environmental issues as a critical priority, addressing them only as necessary and allocating budget as problems occur

Concerned citizen

A company views environmental management as a worthwhile function and provides some top management commitment and support

Pragmatist

A company takes the time to manage its natural environmental problems actively

Proactivist

Similar to pragmatist, however the company ranks environmental management as a top priority

Noncompliance

A company is cost-constrained and cannot react to changing environmental standards

Compliance

A company uses its environmental stance to gain a competitive advantage

Compliance plus

A proactive position on environmental management, where top management uses management systems and policies to encourage organizational change

Commercial and environmental excellence

Views environmental management as good management and strives to be an environmental leader in its industry

Leading edge

Similar to commercial and environmental excellence

End-of-pipe/ Pollution prevention

Minimizes emissions, effluents, and waste

Product stewardship

Minimizes life-cycle costs of products

Sustainable development

Minimizes environmental burdens of firm growth and development

Reactive strategy

No support or involvement of top management, environmental management is not necessary, no environmental reporting, no employee environmental training and involvement

Defensive strategy

Piecemeal involvement by top management, environmental issues dealt with only when necessary, satisfies environmental regulations, little employee environmental training and involvement

Accommodative strategy

Some involvement by top management, environmental management is a worthwhile function, internal reporting by little external reporting, some employee environmental training and involvement

Proactive strategy

Top management supports and is involved in environmental issues, environmental management is an important business function, internal and external reporting, employee environmental training and involvement encouraged

Reactive strategy

Similar to end-of-pipe (Hart, 1995)

Pollution prevention

The companies are characterized by the limited development of conventional green competencies (in terms of product and manufacturing technologies), little development of employee skills, a limited degree of organizational competency development, some adaptation of formal management system, and a rather weak integration of environmental issues into corporate strategies and limited participation of the environmental managers in strategic planning.

Environmental leadership

Similar to the sustainable development strategy proposed by Hart (1995).

continued on following page

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Table 1. continued Author(s) Murillo-Luna et al. (2008)

Categories

The environmental objective is not an objective currently pursued by a firm; a firm hardly dedicates any time and/or financial resources to environmental protection; a firm does not adopt any type of technical or organizational environmental protection measures; a firm does not plan to obtain environmental certifications; a firm has no individuals who are responsible for dealing with environmental issues.

Proactive by attention to legislation response

The environmental objective of the firm consists only of complying with legislation on environmental matters; the firm dedicates to environmental protection only the time and financial resources necessary to comply with legislation; the environmental measures adopted by the firm are not certified; the firm involves external professionals and/or internal personnel who are not dedicated exclusively to the environment

Proactive by attention to stakeholders’ response

The environmental objective of the firm is not limited strictly to compliance with environmental regulations, but also considers stakeholders’ requirements; the firm dedicates the necessary time and resources to environmental protection, the environmental measures require production and work method modifications and or different organizational structures; some environmental measures are certified or in the process of certification; the firm regularly requests the services of external professionals specializing in environmental matters and/or has qualified internal personnel to take care of these matters.

Proactive by total environmental quality response

The environmental objective is one of the priority objectives of the firm; the firm dedicates important budgets to environmental protection; the environmental measures adopted by the firm are highly relevant to conditioning both production processes and organizational structure and how work is performed at the firm; environmental measures are certified; the responsibility for environmental matters is assigned clearly to a certain group of people.

(Burt, 1987). DiMaggio and Powell (1983) distinguished three types of isomorphic pressures: coercive, mimetic, and normative. Mimetic pressures cause an organization to change over time to become more like other surrounding organizations, whereas coercive pressures are defined as formal or informal pressures that are exerted on organizations by other organizations upon which they depend, and normative pressures manifest themselves via the interrelational channels of firm-supplier, firm-customer, professional, trade, business, and other salient organizations (Powell and DiManggio, 1991). With regard to the natural environment, the issue of legitimacy (which is particularly related to stakeholder legitimacy) should be viewed from a strategic rather than an ethical perspective (Haigh and Griffiths, 2009). Murillo-Luna et al. (2008) demonstrated the importance of identifying the

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Descriptions

Proactive by passive response

key stakeholders and appraising the pressures on them when assessing the environmental response patterns of firms. This is related to the notion of a “desirable social good”, and primary stakeholders are the ones that truly count in this regard (Mitchell et al., 1997). These primary stakeholders bear some form of risk due to their prior investment of some form of capital, human or financial, or something of value to a firm (Clarkson, 1994, p. 5). Henriques and Sadorsky (1999) have identified four stakeholder groups that influence firms to protect the natural environment: regulatory stakeholders, organizational stakeholders, community stakeholders, and the media. Buysse and Verbeke (2003) re-categorized these classifications into the following: regulatory stakeholders, external primary stakeholders, internal primary stakeholders, and secondary stakeholders. On the basis of these theories, Murillo-Luna et al. (2008) identified


five groups of stakeholders--corporate government stakeholders, internal economic stakeholders, external economic stakeholders, regulatory stakeholders, and social external stakeholders. Companies could benefit from building better relationships with primary stakeholders. This could result in increased shareholder wealth by helping firms to develop intangible, valuable assets that would function as sources of competitive advantage (Hillman and Keim, 2001). For example, investiture in stakeholder relations may engender customer or supplier loyalty, reduce turnover among employees, or improve firm performance (Hillman and Keim, 2001). Moreover, from an institutional perspective, the firm can facilitate learning and the creation and dissemination of value-producing knowledge (Hillman and Keim, 2001). By developing longer-term relationships with primary stakeholders, firms expand the set of value-creating exchanges with these groups beyond what would be possible with interactions limited to market transactions. Relational transactions may result in value creation (Sharma and Vredenburg, 1998).

A Recommendation of Green IT Strategy As shown in Table 1 (p. 6-8), the majority of the relevant literature has explored and constructed environmental strategies in a general sense. Although these authors have utilized a variety of different phrases to describe different environmental strategies, their strategic formulations all fall somewhere on a continuum between a reactive strategy (companies choose not to react to environmental issues) to a proactive strategy (companies become involved in environmental activities in a variety of ways). To the best of our knowledge, there has been no study thus far conducted to evaluate and generate new strategies in a technological (Green IT) context exclusively from the institutional perspective. Considering that IT strategy is derived from business strategy, existing environmental

strategy theories could not be directly utilized in the context of IS. By adopting the resource-based view theory and incorporating its concepts with those of modern institutional theory, we came up with three recommended Green IT strategies. In this study, Green IT is described as the systematic application of environmental sustainability criteria to the design, production, sourcing, use, and disposal of IT technical infrastructure, as well as within the human and managerial components of the IT infrastructure in order to reduce IT, business processes, and supply chain-related emissions and waste, and to improve energy efficiency (Molla et al., 2009, p.4). An organization’s environmental strategy is highly dependent on its ability to distribute resources toward developing its ability to allocate resources into the further development of basic strategic competencies (Aragon-Corea, 1998). The previous study conducted by Darnall and Edwards (2006) also posited that organizations with higher capacities and greater access to resources enjoy lower environmental adoption costs. When resources enable a firm to establish either a lower cost structure or to demand a premium price for its products or services, the opportunity for superior profits exists (Porter, 1980). In the context of the resource-based perspective, technological resources are process-specific ITs that are utilized to support specific processes (Ray et al., 2004). Technology resources refer to the set of well-known computing technologies in an industry that are available from factor markets and are understood to exert a positive impact on the performance of specific processes (Ray et al., 2004). In accordance with the research of Lucas (2009), we identified three key strategic resources of Green IT: IT infrastructure, IS human and organizational capital, and IS partnership quality. More effective alignments between business and IT strategies have been shown to occur in situations in which the strategy creation processes increased the dialogue between business and IT managers, and resultant strategies identified implementation

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Table 2. Green IT conceptual framework Strategy

Key resources

Institutional isomorphism

Expected Competitive advantage

Tactical green IT Strategy

IT infrastructure

Coercive isomorphism

Cost reduction

Strategic proactive green IT strategy

+ IS human and organizational capital

+ Mimetic isomorphism

+ Knowledge creation

Sustained green IT strategy

+ IS partnership quality

+ Normative isomorphism

+ long-term sustained competitive advantage

responsibilities (Broadbent and Weill, 1993). In this case, we argued that companies making no efforts to address or respond to environmental issues are adopting no Green IT strategy, considering the definition of strategy as “a plan of action designed to achieve particular goals by allocating resources necessary for carrying out these goals” (Chandler, 1997). Thus, we excluded the reactive/passive strategy formulation found in previous strategic research, and focused on the formulation of proactive strategy. According to the key IT resources under institutional isomorphism, we subdivided Green IT strategy into three categories: tactical green IT strategy, strategic proactive green IT strategy, and sustained green IT strategy (Table 2).

1. Tactical Green IT Strategy Previous studies have demonstrated that cost reduction is the initial objective of a firm attempting to incorporate green strategies. Enterprise with technology and vision to provide products and services that address environmental issues is likely to achieve a competitive advantage by reducing energy costs (Vykoukal et al., 2009). Tactical green strategies can be selected by investing in IT infrastructure with the principal initiative being to reduce costs, and can also be regarded as an effort to mitigate government regulations. The investment in physical capital of environmental management practices, including environmental technology, can enable the firm to achieve superior performance (Lucas 2009). As a regulation mitigation effort, this is consistent with the concept of

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coercive isomorphism (Powell and DiManggio, 1991). Coercive pressures on organizations may be affected by a variety of sources, including resource-dominant organizations, regulatory bodies, and parent corporations, and are also built into exchange relationships (Teo et al., 2003). Regulations operate as a form of buffer until new technologies become proven and learning effects become less expensive (Porter and van der Linde, 1995). Investments in pollution reduction technology can reduce material, energy, and service costs, and can also improve efficiency (Porter and van der Linde, 1995; Hart, 1995). Hart (1995) has demonstrated that the negative impacts of pollution can be reduced via either prevention or control. Pollution control refers to efforts to trap, store, treat, and dispose of emissions and effluents. This includes the clean-up of damage from previous operations, the addition of devices to existing processes to capture/treat pollutants (e.g. end of pipe technologies) and the disposal of hazardous wastes. On the other hand, pollution prevention refers to efforts to reduce, change, or prevent the creation of pollutants and wastes throughout the production cycle (Christmann, 2000). Via pollution prevention strategies, companies may realize significant savings, resulting in cost advantages relative to their competitors (Hart and Ahuja, 1994). Pollution prevention may also save not only the cost of installation and operation of endof-pipe pollution control devices, but may also increase productivity and efficiency (Hart, 1995). Moreover, it may reduce the costs of raw materials


and waste disposal, as well as operational costs. These strategies may also potentially cut emissions significantly, thereby reducing the compliance and liability costs of the firm (Hart, 1995). One of the companies that have already successfully implemented this strategy is the Grand Hyatt Singapore, through its Green Energy Management campaign. It has been reported that after the implementation of its green energy management protocols, the project has achieved an investment cost reduction amounting to approximately S$500.000 via the right-sizing of equipment, along with an annual reduction in operating costs of S$1.2 million. During implementation, systems and information technology are utilized to select the right-sized equipment and devices to replace the old devices. As a consequence, this company hopes to see substantial reductions in energy usage and benefit from miraculous cost reductions (NCCC, 2010). Undoubtedly, resources or capabilities are valuable if they enable a firm to reduce its costs and/or respond to environmental opportunities and threats (Barney, 1991). A particular technological resource is useful only within a narrow range of applications (Silverman, 1999), whereas a firm’s technological strength is likely to provide some real commercial advantages. Whereas regulatory environments may constrain heterogeneity by prescribing uniform resource standards, competencies, and methods of deploying resources across given industries and by defining which resources are socially acceptable or permissible as inputs (Oliver, 1997), they also provide opportunities through innovation (Porter and van der Linde, 1995). Hence, we propose herein that firms that respond to coercive pressure tend to make investments in IT infrastructure in an attempt to carve out a competitive advantage in the form of cost reduction. •

Proposition 1a: A firm that adopts tactical Green IT strategy driven initially by coercive isomorphism will simultaneously

•

reduce its emissions by investing in environmentally friendly IT infrastructure. Proposition 1b: Tactical green IT strategies may result in cost reductions and competitive advantage via the reduction of waste costs, emission costs, legitimacy costs, and other associated costs.

2. Strategic Proactive Green IT Strategy Strategic proactive green IT strategy emphasizes more advanced IT infrastructure investments, IS human capital, and organizational capital investments to create greater competitive advantage. Companies select this strategy under the assumption that they go beyond the technical view and consider the environmental issue to be crucial in the creation of intangible knowledge assets. Investment in human capital relates to mechanisms for the hiring, deployment, and retention of employees (Subramanian and Youndt, 2005; Lucas 2009) to create knowledge. The environmental cost in human capital typically relies on the costs associated with the environmental training of all current and new employees, including the environmental leaders. Similarly to physical investment, more complex the technologies are, the more new skills are required from employees at all levels of the firm (Lucas, 2009). This knowledge and skill, obtained through repetition and experimentation over time at all levels of the company, can be considered a source of sustainable competitive advantage (Lucas, 2009). Organizational capital refers to the firm’s formal reporting structure, its formal and informal planning, and the control and coordination of its systems (Barney, 1991). These investments may be internally or externally focused and may require the establishment of an environmental management system and infrastructure investment procedures (Klassen and Whybark, 1999). Under strategic competitive pressure, an organization may be enforced by the actions

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of other structurally equivalent organizations because those organizations occupy similar economic network positions in the same industry and therefore share similar objectives, generate similar commodities, share similar customers and suppliers, and experience similar constraints (Burt, 1987). Faced with problems posed by uncertain technologies, decision-makers or managers may acquiesce to mimetic pressures from the environment to economize on search costs, to minimize their experimentation expenses, or to avoid the risks borne by first-actors (Teo et al., 2003). The study conducted by Wati and Koo (2010) via a case-comparative study design demonstrated that four electronic companies evidenced a relatively similar pattern in responding to green IT challenges, thereby indicating the presence of mimetic pressures. In this vein, organizations with the same ownership structures are expected to develop similar complementary resources and capabilities (Darnall and Edwards, 2006). Thus, the adoption of environmental management practices under mimetic pressures helps a company compete in a dynamic environment, and simultaneously facilitates the creation of valuable knowledge. These environmental management practices may include anything from a firm’s internal efforts at environmental assessment, planning, and implementation, to procedures for the integration of environmental products and process designs into manufacturing operations (Lucas, 2009) as a component of organizational capital investment. Management scholars have also surmised that a relationship between an organization’s environment strategy and its internal capabilities in the basic competencies must be established before organizations can successfully develop advanced environmental management practices that require higher-order learning proficiencies (Christmann, 2000; Darnall and Edwards, 2006; Hart, 1995). Without the support of these capabilities, the adoption of advanced environmental practices will prove more costly (Darnall and Edwards,

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2006). Firms that take a strategically proactive stance develop entrepreneurial, engineering, and administrative processes oriented toward the integration of external information and opportunities (Miles and Snow, 1978). They also tend to develop processes and routines to recognize ideas in order to actively seize and capitalize on new opportunities, rather than to merely react to changes (Sharma et al., 2007). The ability to exploit external knowledge is a critical component of the innovation process, where this ability is largely a function of the level of prior related knowledge (Cohen and Levinthal, 1990). The resource-based view argues that organizations that incorporate knowledge creation can employ it in order to create idiosyncratic modes of technology at any time point (Conner and Prahalad, 1996). These prior theories suggest the following propositions: •

•

Proposition 2a: A firm that adopts a Strategic Proactive Green IT strategy is driven by coercive and mimetic isomorphism--that is, it emphasizes IS human and organizational capital investment. Proposition 2b: Strategic proactive green IT strategies may help a company go beyond cost reduction and focus on the intangible value of knowledge creation.

3. Sustained Green IT Strategy The third strategy is referred to as Sustained Green IT strategy, and this involves the extent to which a company elects to integrate different resource types (e.g. physical, human, social, and organizational) as reflected by its mix of environmental management practices, in order to obtain sustainable competitive advantage (Darnall and Edwards, 2006). A firm that employs this strategy is likely to regard environmental issues as a top priority in its business objectives. Sustainability is the idea of fulfilling the needs of present generations without compromising the ability


of future generations to meet their own needs (Hart, 1997). According to institutional theory, a firm’s ability to generate rents from resources and capabilities will be dependent on the firm’s efficacy in managing the social contexts of these resources and capabilities (Oliver, 1997). When an organization enters into an exchange relationship that runs counter to institutionalized patterns, the maintenance of the relationship requires greater efforts (Teo et al., 2003). Organizations can be regarded as a set of interdependent relationships among primary stakeholders (Hillman and Keim, 2001). Effective stakeholder management may constitute an intangible resource that can serve to enhance firms’ ability to outperform competitors in terms of long-term value creation. Investments in social capital rest largely on the enhancement costs of environmental knowledge via the relationship (both informal and formal) between individuals and teams within the firm, as well as the relationships with stakeholder groups outside the organization (Lucas 2009). Stakeholder theory (Freeman, 1984) proposes that a firm’s economic condition is significantly related with other types of stakeholders, such as customers, suppliers, financiers, and communities. Investment in these intangible resources requires the development of norms that facilitate collaboration, interaction, and the sharing of ideas both within and outside the firm (Subramanian and Youndt, 2005). Ambiguity and uncertainty make the selection of an appropriate strategy somewhat difficult (Abrahamson and Hegeman, 1994), and thus organizations create norms of strategic behavior that may be deemed acceptable by social actors (DiMaggio and Powell, 1983). In the case of interactive technologies (in this study, this refers to Green IT) that involve reciprocal interdependence and complementary innovations, the frequency of use among an organization’s suppliers and customers may directly create positive externalities and increase the technical value of innovation for the organization (Teo et al., 2003). Hence, we proposed the following:

•

•

Proposition 3a: A firm that employs a Sustained Green IT strategy incorporates the importance of IS partnership quality as a key resource along with other resources by considering coercive, mimetic, and normative isomorphism. Proposition 3b: Sustained Green IT strategy may direct a firm toward long-term sustained competitive advantage by employing rare, valuable, and inimitable key resources.

Green IT Strategies Generic Scheme (Path Dependency Approach) Path dependency in technology adoption (Cohen and Levinthal, 1990) is another theoretical perspective associated with the resource-based view of the firm. According to this perspective, a firm’s ability and capacity to adopt newer technologies are most likely a function of the extent of the firm’s historical experience (Lockett et al., 2009). Firms in the same industry compete with substantially different resources using disparate approaches. These firms differ due to differing histories of strategic choice and performance (Schwartz, 2009). Both institutional pressures and organizational characteristics can affect the manner in which organizations adopt environmental management practices (Hoffman, 2001; Schwartz, 2009). Schwartz (2009) studied three companies, focusing on their development of environmental strategies, and concluded that the companies adopted different strategies for the management of environmental demands and that the strategies used by each involved a specific sense of ‘dependency’. In order to develop inimitable capabilities, the companies should attempt to describe an optimal capability development trajectory that is both strictly path-dependent (in order to sustain first-mover advantages) and non-substitutable with an equally efficient trajectory (Miller 2003). Miller (2003) also asserted that companies’ valuable resources or capabilities must constitute

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Figure 2. Green IT strategies Generic Scheme

asymmetries, as well as involving uncommon characteristics. These asymmetries (Miller, 2003, pp. 964): “skills, processes, talents, assets, or outputs an organization possesses or produces that its competitors do not and cannot copy at a cost that affords economic rents”, should be converted into valuable resources or core capabilities by exploring and discovering the asymmetries, turning asymmetries into capabilities by strategically imbedding them within organization design configurations, and matching asymmetry-derived capabilities to market opportunities. The relationship and path dependency of key resources and competitive advantages is illustrated in Figure 2. A resource market imperfection may be exogenous, in the sense that it results from the firm’s possession of some superior physical, organizational or intangible resource that has accumulated as a consequence of the firm’s unique historical evolution (Lockett et al., 2009). IT alone does not explain variations in firm performance measures, but its advantages are gained via their ability to combine explicit technology resources with complementary human and business resources (Jeffers et al. 2008). Skills and knowledge are critical to the success of new technology adoption (Cohen and Levinthal, 1990). Pollution-reduction technologies have evolved from readily

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available, non-value-added pollution control devices to more complex plant infrastructures equipped with environmental technologies (Nehrt, 1996). After a firm has benefited from the initial implementation, further reductions in external processes frequently demand more complex transformation processes or even wholly new technologies, the implementation of which is of course also more complex (Hart 1995). As the firm initiates efforts to modify these processes by incorporating newer and more complex technologies, it creates or acquires tacit knowledge. This form of knowledge has been identified as a critical factor in the successful use of IT to achieve business objectives (Jeffers et al. 2008). Such knowledge cannot be readily copied if the firm relies on historical precedents (path dependency) or is ambiguous and subtle (Miller, 2003). Because IT skills or knowledge are developed over long periods of time, the development of these skills is often a path-dependent and socially complex process (Ray et al., 2004). To the extent that this shared knowledge is valuable and distributed heterogeneously across firms, it may function as a source of competitive advantage (Ray et al., 2004). Thereby, distinctive processes, environment-specific devices, and knowledge ties may


provide a firm with a sustainable competitive advantage (Lucas, 2009). Firms seeking to extend their profitable activities typically require assets to complement their existing resource bundles and also frequently must obtain these from existing firms (Lockett et al., 2009). Absorptive capacity theory (Cohen and Levinthal, 1990) asserts that knowledge confers an ability to recognize the value of new information, assimilate it, and apply it in service of commercial objectives. This absorptive capacity can be generated via R&D investment, direct involvement in manufacturing, and directly through personnel training. The existence of associated expertise should permit the firm to gain better understanding and therefore to evaluate the import of intermediate technological advances that provide signals as to the eventual merit of novel technological developments. Therefore, in environments characterized by uncertainty, absorptive capacity permits the firm to predict more accurately the nature and potential of technological advances. A firm’s absorptive capacity determines a firm’s aspiration level in a technologically progressive environment. The greater the organization’s expertise and associated absorptive capacity, the more sensitive it is likely to be to emerging technological opportunities and the more likely it is that its level of aspiration will be defined in terms of the opportunities present in the technical environment, rather than strictly in terms of performance measures. This absorptive capacity also determines resources allocation decisions for innovative activity (Cohen and Levinthal, 1990). The strategies used by a company to handle environmental issues can be understood in light of its actions and also in light of the manner in which its leaders and managers interpret interactions with other organizations in the same field. The nature of a business leader’s response also depends on the firm’s organizational history (Schwartz, 2009). Organizations that have successfully used IT to obtain a competitive advantage have been able to do so as the result of a long history of choices

regarding the acquisition and deployment of IS resources. IS capabilities develop over time via the development, evaluation, and refinement of routines within the IS department (Ravichandran and Lertwongsatien, 2005). Thus, we conceptualized the following two propositions: •

•

Proposition 4a: The current success of a firm’s strategic proactive Green IT strategy is dependent on the prior tactical Green IT strategy implemented by the firm. Proposition 4b: The prior strategic proactive Green IT strategy and tactical Green IT strategy contribute to the successful implementation of a current Sustained Green IT strategy

CONCLUSION AND FUTURE RESEARCH DIRECTIONS In summation, we have conceptualized “Green IT strategy” from the resource-based view perspective by taking into consideration the relevance and role of institutional isomorphism. We proposed three different strategies that could be adopted by a company: namely, tactical green IT strategy, strategic proactive green IT strategy, and sustained green IT strategy. We also demonstrated that the Green IT strategy is path-dependent, that is, a firm’s previous experience and history helps to determine the firm’s current strategy. This conceptual study has two important implications for research in the field of IS management. First, we demonstrate that green IT strategies are dependent on the organizational characteristics (in this case, resources and capabilities of the firm) and institutional factors (legitimacy motive) of a firm. We also demonstrated three strategic IT resources (IT infrastructures, IS human and organizational capital, IS relationship capital) that may lead to competitive advantages (cost reduction, knowledge creation, and sustainable competitive advantage) at a certain level.

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Second, the Green IT strategy is path-dependent; that is, prior strategies adopted by a firm in the past will determine the strategies chosen by a firm in the present. This outcome is consistent with the resource-based view theory (Barney, 1991) and its extension (Hart, 1995) as well. According to prior research, competitive advantage develops over a period of time and closely reflects decisions made by the organization concerning resource acquisition and deployment (Ravichandran and Lertwongsatien, 2005). Our proposed model also suggests that sustainable competitive advantage is the consequence of a firm’s long-term commitment to environmental issues, and can only be achieved by a firm with sufficient IT resources and capabilities. This study also calls for further research to strengthen the conceptual model. Firstly, empirical research will be necessary to verify the model proposed herein. Because such an approach is necessary from real-sustainability actions at an organizational level, researchers should consider conducting a model-based case-comparative study. Secondly, the propositions presented in this paper were based on a theoretical perspective; thus, they should be validated via direct observation in the field of green IT. Thirdly, even though in an actual market situation, some companies have implemented green IT quite well, this process remains somewhat rife with ambiguity. Both academics’ and practitioners’ perspectives are required to determine how companies tackle Green IT challenges, and also how these issues are institutionalized into and incorporated with business strategies. Finally, owing to the dearth of research thus far into Green IT theory from the IS perspective, we also pose a challenge to researchers in this field to enhance and establish the current body of knowledge regarding the Green IT strategic concept.

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ADDITIONAL READING Aragon-Correa, J. A. (1998). Strategic proactivity and firm approach to the natural environment. Academy of Management Journal, 41, 556–568. doi:10.2307/256942 Bansal, P., & Roth, K. (2000). Why companies go green: A model of ecological responsiveness. Academy of Management Journal, 43(4), 717–736. doi:10.2307/1556363 Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–126. doi:10.1177/014920639101700108 Bharadwaj, A. S. (2000). A resource-based perspective on information technology capability and firm performance: An empirical investigation. Management Information Systems Quarterly, 24(1), 169–196. doi:10.2307/3250983 Buysse, K., & Verbeke, A. (2003). Proactive environmental strategies: a stakeholder management perspective. Strategic Management Journal, 24(5), 453–470. doi:10.1002/smj.299 Chandler, A. D. (1997). Strategy and Structure. (Ed). Resources Firms and Strategies, A reader in the resource-based perspective, Oxford University Press, New York, USA, 40-51. Christmann, P. (2000). Effects of ‘best practices’ of environmental management on cost advantage: the role of complementary assets. Academy of Management Journal, 43(4), 663–680. doi:10.2307/1556360

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Conner, K., & Prahalad, C. K. (1996). A resourcebased theory of the firm: knowledge versus opportunism. Organization Science, 7(5), 477–501. doi:10.1287/orsc.7.5.477 Crowe, D., & Brennan, L. (2007). Environmental considerations within manufacturing strategy: an international study. Business Strategy and the Environment, 16, 266–289. doi:10.1002/bse.482 DiMaggio, P., & Powell, W. W. (1991). Introduction. In Powell, W. W., & DiMaggio, P. J. (Eds.), The New Institutionalism in Organizational Analysis (pp. 1–38). Chicago: University of Chicago Press. Freeman, E. (1984). Strategic Management: A Stakeholder Approach. Boston, MA: Pitman. Hart, S. L. (1995). A natural-resource-based view of the firm. Academy of Management Review, 20(4), 986–1014. doi:10.2307/258963 Henriques, I., & Sadorsky, P. (1999). The relationship between environmental commitment and managerial perceptions of stakeholder importance. Academy of Management Journal, 42(1), 87–99. doi:10.2307/256876 Kearns, G. S., & Lederer, A. L. (2003). A resourceBased View of Strategic IT Alignment: How knowledge sharing creates competitive advantage. Decision Sciences, 34(1), 1–29. doi:10.1111/15405915.02289 Klassen, R., & Whybark, D. (1999). The impact of environmental technologies on manufacturing performance. Academy of Management Journal, 42, 599–615. doi:10.2307/256982 Miles, R., & Snow, C. (1978). Organizational Strategy, Structure and Process. New York: McGraw Hill.

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Molla, A. Vanessa A. Cooper, Siddhi Pittayachawan. (December 2009). IT and Eco-sustainability: developing and validating a green IT readiness Model. Paper presented at ICIS 2009, Phoenix, Arizona, USA. Oliver, C. (1997). Sustainable competitive advantage: combining institutional and resource-based views. Strategic Management Journal, 18(9), 697–713. doi:10.1002/ (SICI)1097-0266(199710)18:93.0.CO;2-C Paulraj, A. (2008). Environmental Motivations: a classification scheme and its impact on environmental strategies and practices. Business Strategy and the Environment, 18(7), 453–468. doi:10.1002/bse.612 Porter, M. E. (1980). Competitive Strategy. New York: Free Press. Porter, M. E., & van der Linde, C. (1995). Toward a new conception of the environment-competitiveness relationship. The Journal of Economic Perspectives, 9(4), 97–118. Ravichandran, T., & Lertwongsatien, C. (2005). Effect of information system resources and capabilities on firm performance: A resourced-based Perspective. Journal of Management Information Systems, 21(4), 237–276. Sharma, S., & Vredenburg, H. (1998). Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities. Strategic Management Journal, 19(8), 729–753. doi:10.1002/ (SICI)1097-0266(199808)19:83.0.CO;2-4 Shrivastava, P. (1995). Environmental technologies and competitive advantage. Strategic Management Journal, 16, 183–200. doi:10.1002/ smj.4250160923


Silverman, B. S. (1999). Technological resources and the direction of corporate diversification: toward an integration of the Resource-based view and transaction cost economics. Management Science, 45(8), 1109–1124. doi:10.1287/mnsc.45.8.1109 Teece, D. J., Pisano, G., & Shuen,A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509–533. doi:10.1002/ (SICI)1097-0266(199708)18:73.0.CO;2-Z Wati, Y., & Koo, C. (January 2010). The Green IT Practices of Nokia, Samsung, Sony, and Sony Ericsson: Content Analysis Approach. Paper presented at HICSS-43, Hawaii. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180. doi:10.1002/smj.4250050207

KEY TERMS AND DEFINITIONS Resource-Based View: A theory that states valuable, rare, and imitable resources are needed to sustain competitive advantage. Institutional Theory: A new perspective that views organizational practices and policies as legitimate and rational efforts to maintain competitive advantage. Tactical Green IT Strategy: Green IT strategy with its principal focus on cost reduction. Strategic Proactive Green IT Strategy: Green IT strategy that places emphasis on more advanced IT infrastructure investments, where IS human and organizational capital is the key resource in the creation of more competitive advantage. Sustained Green IT Strategy: Green IT strategy to integrate different resource types with the key resource is the IS social relationship, and allows for long-term sustainable competitive advantage. Path Dependency Theory: A theory that explains how a set of current decisions is limited by the decisions one has made in the past.

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Chapter 9

Information and Communication Technologies (ICT) in Building Knowledge Processes in Vulnerable Ecosystems: A Case for Sustainability Prakash Rao Symbiosis International University, India

ABSTRACT Changes in precipitation, temperature, glacial melt patterns and sea level rise are being seen as increasingly affecting the world’s ecosystems and natural resource base. Recognizing the value of information available from the broader community and also the changing framework of traditional knowledge and local perceptions, an integrated approach to building knowledge based scientific information is proposed through the use of effective ICT based tools and strategic information databases and networks. Technological advances have a major role to play in developing a sound, efficient, and sustainable pathway for a region or country in the face of increased economic growth. The increasing conflicts arising between economic growth and natural processes or green ecosystems can only be bridged if sustainable and innovative technologies are adopted for sharing information and diffusion across different sectors of society. The present chapter explores the use of some of the current state of the art technologies like ICTs including tools like Remote Sensing and GIS as a means for providing sound and efficient decision making across various sectors. DOI: 10.4018/978-1-60960-531-5.ch009


Information and Communication Technologies (ICT) in Building Knowledge Processes

INTRODUCTION Since the last industrial revolution, emissions resulting from anthropogenic activities have led to a substantial increase in the atmospheric concentration of greenhouse gases. The resultant warming of the earth’s atmosphere, has consequently led to a rise of about 0.8 ° C in the average global surface temperature. As a result of these changes,widespread ecological and socio economic impacts of climate change is likely to threaten the future growth and economic activities of several countries in the Asia Pacific region. Some indicators and triggers of global warming include increased extreme weather events (including more flooding, drought, frequent heatwaves,cyclones, depressions), increased agricultural losses, sea ice melt, retreating glaciers, sea level rise, coral bleaching, and decline in biodiversity. Communities in both developed and developing countries are already suffering from these impacts, and tropical countries are likely to be more vulnerable than developed countries. Scenarios compiled by the Intergovernmental Panel on Climate Change (IPCC 2007b) suggest than unless humans dramatically reduce greenhouse gas emissions, we will see a doubling of pre-industrial carbon dioxide concentrations resulting in an increase of the earth’s temperature from between 1.1 to 6.4°C (depending on estimates for low and high scenarios), with recent modeling suggesting upwards of 11 °C by the end of the century (Stainforth et al, 2005). The last decade has been observed as the warmest with India and South - East Asia experiencing frequent extreme climatic events. While recent climate models predict an increase in rainfall patterns regional change may be different (Rupa Kumar et al, 2006). The Indian subcontinent harbours some of the most ecologically diverse and fragile ecosystems where the local environments are under threat from a variety of factors. Recognising the fact that climate change is now an added stress

factor to the survival of several million people across some of India’s diverse landscapes, several initiatives have been taken up at various levels of governance ranging from local to global. The United Nations Framework Convention on Climate Change (UNFCCC) through its Conference of Parties (COP) focuses on Impacts and Adaptation, mitigation and policy interventions to address the threat of climate change. The science and technology panel of the United Nations Convention to Combat Desertification (UNCCD) advocates use of a communication based system through an interface of top down and bottom up approach to tackle preparedness against extreme events like drought.

BACKGROUND India is an agriculture based developing economy, surrounded by a long coast line and a mountainous Himalayan range in the north. Given this, the country is vulnerable to any major changes in the overall climate. There is an urgent need for developing strategic interventions to address the adaptation needs of local communities and ecosystems based on impact studies and the use of appropriate technology and communication based solutions and strategies. Regional climate variability and the various uncertainties involved in projecting future climate scenarios make local adaptation attributes a very complex issue and often region specific. Civil society interventions often have strong linkages to field and grass roost based sustainable development projects with a particular focus on some of the vulnerable ecosystems of the Indian sub continent like the Himalayas, Sundarbans and the coastal regions and agriculture.

Himalaya The vast number and range of glaciers and perennial river systems originating from the Himalaya

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mountain range in the north are the major source of freshwater supplies to the subcontinent. Due to rising temperature and changing precipitation pattern, the glaciers are retreating at an alarming rate, posing immediate threat to fresh water availability in the South Asian countries (WWF Report 2005). The direct evidence of real climate change impacts in the Himalaya requires immediate attention of the international community as well as regional and national policy makers for consideration in any future development planning.

Sundarbans Sundarbans is the world’s largest mangrove ecosystem, a UN World heritage site, a biosphere reserve, now under severe stress due to sea level rise and associated problems. The four million inhabitants residing in the Indian Sundarbans are severely stressed due to abnormal climate impacts affecting their overall livelihood. The threat to the survival of endangered species like Tiger, Turtles and some of the rare mangroves is also a major conservation issue in this unique ecosystem.This will adversely affect the overall ecological balance and increase the vulnerability of the region. Immediate attention is required from the world community as well as stakeholders at the local level, to develop an effective coping mechanism to reduce the vulnerability of the region.

Coastal Ecosystems The coastal region of India is perhaps one of the most productive and ecologically diverse landscapes covering over 6000 kms of coastline. The importance of promoting regional fisheries in enhancing local livelihoods through sustainable measures is an important aspect of maintaining local ecological balance. A vast majority of coastal communities are currently facing stress form various pressures like large scale development along costal sites which threaten to affect their survival.The impacts of climate change is

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likely to further add to the growing changes and decline in the productivity of marine ecosystems in India’s coastal sites.

INFORMATION AND COMMUNICATION TECHNOLOGIES AS SUSTAINABILITY TOOLS IN BUILDING KNOWLEDGE PROCESSES In recent times the Indian subcontinent has been exposed to many global environmental changes and increasing the vulnerability of its ecosystems and people. Two of the most sensitive ecosystem in the subcontinent, namely the coastal region and the Himalayas are under tremendous pressure from a wide range of biotic and abiotic pressures leading to increased stress to the natural ecosystem and livelihood of people. The increased pressure from resource scarcity in such critical ecosystems often cause a severe imbalance to the economic growth and livelihood patterns of local people and regions. This has long term implications for sustainability of a region’s diversity from environmental,social, economic and technological perspective. The use of information and communication tools is a step in understanding some of the dynamics of such complex ecosystems and can greatly contribute to the mitigative efforts of environmental stress. Increasing use of technology also means that there needs to be a holistic approach to building capacity of all levels of stakeholders to understand some of the techniques for adapting to changing environmental conditions.

Coastal Ecosystems The oceans and seas are an integral part of the earth’s climate system and are responsible for maintaining the natural circulation patterns. According to the Inter Governmental Panel on Climate Change (IPCC) climate change impacts on the ocean and marine ecosystems are likely


to play a significant role in shaping the changes of the sea surface temperature, sea level, sea ice cover, salinity, ocean circulation and climate related oscillations. Some of the main features of observed and projected changes in the characteristics of ocean systems include:

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Marine ecosystems are also likely to be affected by changes in sea water temperature, oceanic circulation patterns which may lead to changes in composition of marine biota, timing of migratory patterns, disturbances in ecosystem function. The increased amounts of CO2 absorbed by oceans are also likely to have significant impacts on the acidity of ocean waters which in turn can have serious consequences for certain marine animals like mollusks, corals etc. The Fourth Assessment Report of the IPCC (IPCC 2007b) has suggested that climate change is likely to have significant impacts on the coastal regions of India. Some of these include:

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An increase of the global ocean heat content since the 1950s. Global average sea level rise of between 0.1 -0.2 m due to thermal expansion of water and the loss of mass from glaciers and ice caps. This is expected to increase to 0.6m or more till 2100. (IPCC 2007b) A decrease in the extent of sea ice in the Northern hemisphere of more than 10% including a decrease of 40% in recent decades of sea ice thickness An increase in the frequency, persistence and intensity of extreme weather events based on the El Nino southern oscillation (ENSO) cycle since the mid -1970’s.

Over the past few years changes in rainfall, currents, and sea level associated with global warming, are already affecting the world’s coastal ecosystems and fisheries. The recent IPCC report has also provided ample evidence of the implication of climate change on our biodiversity and the increasing vulnerability of some of our critical ecosystems and consequences for livelihoods of people. Erratic weather and monsoon patterns, along the Indian coastline along with frequent extreme climatic events like cyclones are major threats to the ecosystem including in some cases low-lying islands some of which are already facing partial submergence resulting in shoreline changes. Coastal ecosystems are particularly sensitive to physical and biochemical changes with reference to:

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Increased level of flooding, loss of wetlands and mangroves and saline water intrusion into freshwater habitats. Severity and increase of cyclonic events leading to coastal erosion, loss of ecological diversity along shorelines.

Increased frequency of hotter days and multiple-day heat wave in the past century with increase in deaths due to heat stress in recent years. Sea-level rise has led to intrusion of saline water into the groundwater in coastal aquifers and thus adversely affecting local freshwater resources. e.g. for two small and flat coral islands at the coast of India, the thickness of freshwater lens was computed to decrease from 25 m to 10 m and from 36 m to 28 m respectively, for a sea level rise of only 0.1 m. Warmer climate, precipitation decline and droughts in most delta regions of India have resulted in drying up of wetlands and severe degradation of ecosystems Ganges-Brahmaputra delta: More than 1 million people are likely to be directly affected by 2050 from risk through coastal erosion and land loss, primarily as a result of the decreased sediment delivery by the

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rivers, but also through the accentuated rates of sea-level rise. In coastal regions like the Sundarbans delta in West Bengal, the recent drastic changes in weather conditions and monsoon patterns, along with frequent extreme climatic events like cyclones are major threats to the ecosystem of the region. Climate change induced by anthropogenic activities is thought to be behind the observed rise in sea level, lengthier summers, and a dramatic increase in rainfall over the past 15-20 years. The already marginal economy of human populations dependent on single crop agriculture, fishing and harvesting of forest resources is also adversely affected by changes such as sea level rise, increase in salination, changing patterns of rainfall, and increase in moisture content in the atmosphere leading to increasing incidences of vector-borne diseases. This has increased their vulnerability and possibly their dependence on the forest resources. Similarly fluctuations in the sea surface temperature along the coasts of Bay of Bengal and Arabian Seas have also resulted in changes and decline in the availability of fish species some of which are of good commercial value. Impact of climate change on regional fisheries can be ranked in terms of likelihood (for either warming or cooling) of impacts. Most of this knowledge comes from empirical studies over the recent 50 years, when weather and environmental records became fundamental to explaining individual species’ behaviour and population responses to changes in local conditions. Climate events such as ENSO warm and cold events promote different levels of productivity. According to K. Krishna Kumar of the Indian Institute of Tropical Meteorology (IITM),Pune in a paper published in Science, (1999) the weakening link between ENSO and the Indian monsoon could be a result of global warming. It is also a well known fact that many large civilisations grew along the banks of rivers and coasts. More than half of the world’s population

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presently resides in the coastal zone of Asia. Demographic changes, urbanization, industrial development, trade and transport demands, and lifestyle changes have largely been responsible for the increasing pressure on coastal regions. Tropical Asia would probably experience the highest impact of present day climate variability and therefore is more prone to global climate change. In the Asia Pacific region many low-lying coastal cities are at risk and at the forefront of impacts. These include developing cities like Shanghai, Tianjin, Guangzhou, Jakarta, Tokyo, Manila, Bangkok, Karachi, Mumbai, and Dhaka all of which have witnessed significant environmental stresses in recent years. A recent study (McGranahan,Balk and Anderson,2007) indicates that one tenth of the global population live in coastal areas that lie within just ten metres above sea level. The study also brings home the fact that nearly two-thirds of urban settlements with more than 5 million inhabitants are at least partially in the 0-10 metre zone while on an average, 14 percent of people in the least developed countries live in the zone (compared to 10 percent in OECD countries).

Local Knowledge Processes and ICT in Coastal Systems The use of Information and Communication technologies have greatly enhanced the resilience and adaptive capacity of the coastal ecosystem. Studies by researchers in the low lying coastal region of the east coast of India have tried to introduce various state of the art technologies to understand the local systems better.). A comparison of satellite data from 1998 and 1999 showed that some of the islands in the Sundarbans delta in West Bengal, India have undergone severe erosion of about 3.26 km2 (Kumar et al,2007). International conservation organisations like the World Wide Fund for Nature (WWF) have helped bring technology closer to the needs of local communities in order to ensure that the stools and technologies


can act as an aid to quantify the extent and nature of the development change to develop sound and sustainable land-use practices. Deltaic regions like the Sundarbans, experience repeated occurrence of cyclonic storms and depression and communication tools like early warning systems need to be strengthened to increase adaptive capacity. The WWF Climate adaptation Centre at Mousuni island in the Sundarbans is an example of building local knowledge for local communities. This is being achieved by integrating academic, industry and civil society involvement in helping to bring out natural solutions and helping local communities towards sustainable development against adverse impact of climate stresses. Setting up of these early warning systems is an excellent example of addressing disaster risk reduction from a short term and a long term perspective. The use of high resolution remote sensing technologies have also helped to get a better understanding of coastal zone dynamics and developing response mechanisms. A recent study using high resolution digital elevation model data and importing more than 80,000 GPS point data sets (Loucks et al, 2010) in Bangladesh Sundarbans suggests that an expected sea level rise of 28 cm above 2000 levels is likely to severely impact the remaining resident population of the Bengal tigers in the Sundarbans ecosystem. Lack of remaining tiger habitat as a consequence of sea level rise may lead to decline of the species by as much as 96 percent with very few remaining breeding pairs of the species in the delta.

Agriculture One of the major sectors which drives the economic activity of a large developing nation like India is agriculture. Much of India’s agriculture economy is monsoon dependent and rural poor and farmers living in the rainfed regions are vulnerable to the variability of the monsoon leading to either excess rainfall or drought like conditions.The limited

resources at the disposal of the rural communities coupled with high level of climate risks identified is a threat to food security, livelihood and economic prosperity of local communities. Scientific institutions and civil society organisations have therefore been trying to design appropriate coping strategies and mechanism aimed at building a sound adaptation framework to meet some of the threats. While technology driven processes like low cost water harvesting solutions have their benefits, it is important to first understand the needs and perception of the farming community on the importance on climate change and its impacts on agricultural productivity as well as current adaptation measures being taken up. Under the Government of India’s All India Coordinated Research project on Agro meteorology, a recent survey found that about 70-100% of farmers had prior knowledge about climate change related issues. Enhancing rural livelihoods option in rain fed regions in remote and inaccessible terrain like the Himalayas requires innovative technology interventions to enable rural farming communities to address future impacts of climate related stress. Institutions like MS Swaminathan Research Foundation,Chennai, India have pioneered the concept of a village knowledge centre in several states across India. These act as resource centres which provide information on local weather forecasting through weather based agro meteorological observatory services and crop management practices through internet kiosks.

Local Knowledge Centres of Farmers In the state of Andhra Pradesh,India village based knowledge centres have been developed where science based ICT tools have been used to predict the variability of drought like conditions and micro level preparedness against drought. The International Crops Research Institute for Semi Arid Tropics (ICRISAT) with assistance from the Government of Andhra Pradesh have

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developed a low cost ICT tool in eight villages aimed at providing detailed queries about local agricultural and weather patterns to village communities through the use of a desk top based system connected through an Internet Hub. A local NGO coordinates these rural knowledge centers through maintenance of the records of responses and solutions provided by technical experts. (Sreedhar et al, 2009). The rural knowledge centers have also helped build capacity for local women to undertake their own weather measurements of rainfall temperature. Generation of local level drought vulnerability maps using GIS based colour coding mapping tools have helped raise awareness about drought impacts in the region. Community perception about past weather patterns and drought vulnerability assessments is a key component in developing a knowledge based adaptation practices besides useful use of technology and communication tools. ICT tools at community level will ensure availability of critical information at the right time apart from getting a better understanding of future climate risks.

Himalayan Ecosystem Climate change is now recognized one of the most prominent threats facing civilisation and with the prospect of a series of impacts in a climate constrained world. Apart from the likelihood of impacts on our natural ecosystems there are various underlying uncertainties in terms of the magnitude, range and timing of these impacts. The only way by which these uncertainties can be reduced is to understand and monitor the global and regional climate systems extensively. One of the most important indicators of climate change is the phenomenon of retreating glaciers with potential implications for future freshwater availability and flows and water resource management. Over the past two to three decades various scientific institutions, academics, mountaineers across the world have been documenting the existence of glaciers through meticulous field

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studies as well as through mountaineering expeditions. In earlier times most of our knowledge of glaciers came through historical and anecdotal knowledge mainly through expeditions in different parts of the world. The quest to explore the vast frontiers of nature has often led man to the remotest corners of our planet and consequently a vast storehouse of information and knowledge is documented through various mountaineering groups and societies. Changes in the behaviour of glaciers are considered as important indicators of climate change.Synoptic climate change expresses itself as micro-scale perturbations in meteorological variables, such as incoming radiation, temperature, cloudiness and precipitation, which are translated through glacier surface mass balance into changes in glacier geometry (Kumar et al, 2007). Thus, the changes in glacier characteristics are a sensitive indicator towards the variation in the meteorological and environmental features. According to Fourth Assessment Report (IPCC, 2007b) of the Inter Governmental Panel on Climate Change (IPCC), mountain glaciers and snow cover have declined on an average in both hemispheres. Widespread decreases in glaciers and ice caps have contributed to sea level rise and increased runoff and earlier spring peak discharge in many glacier- and snow-fed rivers. This has also caused enlargement and increased numbers of glacial lakes. In the course of the century, water supplies stored in glaciers and snow cover are projected to decline, reducing water availability in regions supplied by melt water from major mountain ranges, where more than one-sixth of the world population currently lives. The Himalayan region which has been for long a major focus for the scientific community has attracted much attention in the recent past as a very fragile ecosystem. The Indian Mountaineering Federation (IMF) has been instrumental in providing a platform for mountaineers and other explorers to travel to various parts of the Himalayas and record their observations. Other institutions which have been


at the forefront of spreading our knowledge of the Himalayan region include the Himalayan Club, the Himalayan Environment Trust etc. through a dedicated group of people who have interests in conserving the sacred space of the Himalayas. Scientific organizations have also been recording the various facets of the Himalayan ecosystems and in particular the extent of glacial presence in the region. While documenting glaciers is an onerous task, nevertheless scientific institutions have been able to provide key facts about some of the glaciers in the Himalayas. The task of studying glaciers is at time consuming process and involves detailed methodological processes at different levels depending upon the extent and type of glaciers being studied. Various methods are used to study glacial retreat patterns in different parts of the world. The lack of access and inhospitable terrain to most regions in the Greater Himalayas has hampered in depth field studies to monitor a key resource like glaciers. However, recent advances in technology and satellite based estimation have helped scientists to obtain field observations and remotely sensed data. The length and characteristics of glaciers often determine the methodologies that are adopted to determine the area extent of the glacierised region. These methodologies help in monitoring glacier positions including changes in snout position, surface area, volume elevation and ice mass. Two commonly used information and communication technology tools that have been used to monitor to glacier and water resources are : 1. Remote Sensing 2. Automatic Weather stations

Remote Sensing Remote Sensing and the processing of remotely sensed data through Geographical Information system (GIS) are two most important synergistic technologies which offer present ecologists and

resource managers, tolls of tremendous potential value – to address their needs and process their information (Roughgarden et. al. 1991 and Sample 1994). GIS and Remote Sensing allows the processing and viewing the recorded information on different spatial scales. These tools have been termed as geostatistical tools by Rossi et.al. (1992) and have been described as the tools for modeling and interpreting ecological data in spatial form. Howard et.al (1996) has highlighted the importance of the remotely sensed data in linking ecological information recorded from ground, air and space. Cornett (1994) and Sample (1994) emphasize that GIS and Remote Sensing are catalysts for effective public involvement in ecosystem management planning, analysis and policy making. Satellite remote sensing data has emerged as a potential tool to study land cover, vegetation type and human interventions at fine to coarse scales. The data provides details on habitat with very high accuracy and in a low cost effective manner. The information base can be judiciously combined with the ground-based studies for comprehensive analysis and modeling. Information content available in the multispectral data can form a common database for integrated resource inventories, which are necessary for the habitat characterization, monitoring and management. Due to the similarity of the temporal data set and repetitiveness, monitoring of the habitat can be accomplished with very high reliability. On the other hand the GIS data set allows storage, retrieval, and analysis of spatial and non-spatial data in a computer domain. Updating of GIS information base for monitoring purposes is an efficient as well as cost-effective means. The use of remotely sensed data is of great relevance and importance particularly for studies in glacier considering their inaccessibility in remote mountain regions of the world. Remote sensing as a tool is used for mapping area and length of glacier particularly for large glacier where mass balance studies are inadequate. Recent advances

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Figure 1. Methodology flow chart showing the AOC

in satellite technology have enabled scientists to monitor changes in glacial retreat patterns using a combination of Remote Sensing satellite imageries. By superimposing past satellite data on present maps, area of recession of individual glaciers is estimated with a fair degree of accuracy using techniques like image enhancement. Recent studies have involved the use of high resolution satellite data i.e. CARTOSAT -1 of IRS (Indian Remote Sensing Satellite).CARTOSAT-1 satellite data with a 2.5m resolution with fore and aft image stereo pair images, have been used to generate the height information of an area. In order to identify the land use and glacial spread area it was also necessary to get the true color or FCC (False Colour Composite) of that area. For this purpose LISS III (Linear Image Self Scanning) multi spectral data was spectrally fused with the CARTOSAT PAN data, to give spectral four band (including visible portion of electromagnetic spectrum) output with 2.5m spatial resolution. Apart from this a DEM (Digital Elevation Model) from Cartosat -1 satellite data was created by satellite define RPC (Rationalize Polynomial Coefficient) technique. In the Cartosat – 1 stereo

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pair consist two satellite fore and aft stereo pair images and RPC file for both the images. In the initial stage all these mentioned files were used to generate tie point generation. Tie point are the points which can be identified in both of the images and both the images can be georeferenced on the basis of these tie points. At some places we provided some tie points to the defined places on the basis of the field survey points taken by the DGPS (Differential Global Position System). After the generation of tie point generation left and right epipolar images was generated, which was working as an input to DEM. Now the left and right epipolar images were used to create DEM. After creating DEM a 3-D model of AOC (Area of Concern) was prepared and analyzed. In India, Remote sensing studies using time series data have provided valuable insights into the retreat pattern of glaciers. (Kulkarni and Bahuguna,2002, Kulkarni et al., 2002). The use of Differential Global Positioning Systems (DGPS) based data also helps in determining snout position / extent of a glacier resulting in a higher degree of accuracy. GIS based technologies are used in developing spatial databases on land use/


Figure 2. Use of Remote Sensing technology for analysing glacial changes in the Himalayas

significantly greater frequency including real time information. Besides this an AWS also provides data in all weather, day and night, 365 days per year and can be installed in extremely remote and sparsely populated areas. Different users of AWS have different requirements. These include: •

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Short-term projects (e.g. animal health emergency monitoring or near wild fires), some are installed for long-term projects (e.g. studying climate change) Real time data (e.g. for irrigation), some provide delayed reports (e.g. for climate monitoring) All weather monitoring (e.g. for cyclone forecasting), some do not (e.g. crop disease monitoring).

land cover of a region which provide very useful formation on extent of glacial surface area/volume etc.

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A common set of conditions for all the above is that data must be representative of the area and time period under investigation, and that the data must continually meet the accuracy required. In addition, the data collection and storage systems must be cost effective and must also be considered before AWS purchase.(Bureau of Meteorology, Australian Government) One of the key attributes of a good Automatic Weather station is the use of suitable sensors to record and monitor various weather parameters. The Bureau of meteorology, Australian Government has provided some indicators of the various types of sensors which can used to effectively monitor weather data. Choosing sensors appropriate to the user’s requirements an important part of monitoring weather related information. This is also dependent on the type of research project that is being undertaken. The Bureau’s standard AWSs use sensors to monitor temperature, humidity, wind speed and direction, pressure and rainfall. Various advanced sensors are available for specialised applications. These sensors can monitor cloud height, visibility,

Recent advances in communication technologies have greatly helped understand the behaviour and dynamics of glaciers at high altitude under adverse climatic conditions. The use of a state of the art Automatic Weather Station (AWS) monitors the characteristics of high altitude Himalayan glaciers through real time data recording and monitoring. Using tools like AWS, research on glacial melt patterns of large glaciers like the Gangotri glacier in the Himalayas is better understood. The AWS installed for glacier studies records data on various parameters through a data logger which can then be downloaded for analysis. The various parameters for which data is collected and analysed includes barometric pressure, temperature, humidity, rain, wind speed, wind direction, wind chill factor, dew point, heat index and UV and solar radiation. A field team is normally based at the glacier for this purpose to study the relationship between glacial ablation and temperature. The use of AWS is necessary as it is consistent in the measurements of multiple weather parameters. The data from an AWS is also available at a

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present weather, thunderstorms, soil temperature (at a range of depths) and terrestrial temperature. The quality of the final data received by the researcher or farmer can only be as good as the quality of the sensors used. No post analysis of the data can improve the accuracy or reliability of the information obtained. Many AWS manufacturers use sensors which have poor accuracy, and whose calibration may drift significantly over a short time. Some sensors, particularly local made are also prone to premature failure. The manufacturer’s sensor specifications should be read very carefully as they can be misleading in some situations and manufacturer’s claims can often not be replicated in the laboratory. For example, a manufacturer may quote the response time for a humidity sensing element but not the combined response time of the sensing element, electronics and filter which can be orders of magnitude longer; also, the manufacturer may quote an accuracy for a device such as a pressure sensor but give no indication as to confidence limits of the specification. These omissions can make a large difference as to the suitability of the device. There are a number of fundamental characteristics which make up the accuracy and precision of a sensor. •

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Resolution - the smallest change the device can detect (this is not the same as the accuracy of the device). Repeatability - the ability of the sensor to measure a parameter more than once and produce the same result in identical circumstances. Response time - normally defined as the time the sensor takes to measure 63% of the change. Drift - the stability of the sensor’s calibration with time. Hysteresis - the ability of the sensor to produce the same measurement whether the phenomenon is increasing or decreasing.

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Linearity - the deviation of the sensor from ideal straight line behaviour.

All of these factors go into defining the accuracy and precision of a sensor. In the present case monitoring climatic temperature changes at high altitude regions in the Himalayas requires that a significant amount of data is collected over a long period and therefore a sensor is required which has very little drift. It is also necessary to ensure that AWS as a device should be sturdy and robust to withstand the vagaries of weather. As a general rule, these devices are installed in harsh environments. For the present study e.g the AWS was installed at an altitude of about 13000 feet in the high himalayas where weather conditions and terrain was extremely harsh. This requires the sensors to be well designed and constructed, have strong waterproof cover for the electronics and be able the withstand extremes of climate variability. It is counterproductive to install a lightweight wind vane that will break the first time a bird sits on it or to use a sensing device which is designed for laboratory use (e.g. many humidity probes) in a dusty environment. Frequent replacement of lightweight or unreliable instruments can end up costing more than their more costly counterparts. The swapping of sensors can also have a significant effect on the quality of data, frequently introducing discontinuities into a data series. Although AWS are a boon to gather data on weather parameters we also need to ensure that these communication technologies need to give us the right kind of outputs through appropriate formats. In most situations the format used should be: •

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Flexible - so new sensors can be added without having to re-process all the stations records into the new format Simple - such that only simple programming is required to decode the data


Figure 3. An automatic weather station installed in the himalayas (photo: dr rajesh kumar)

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Preferably human-readable without reformatting - to assist in the quality monitoring of the data Independent of AWS manufacturer - to allow data to be easily exchanged between agencies and to encourage cost competitiveness between manufacturers Unambiguous - the use of features such as check-sums minimise the possibility of data corruption

FUTURE RESEARCH TRENDS The need for continuous monitoring of ecosystems necessitates the availability of state of the art technology and tools apart from regular capacity building of manpower to use the technologies. Various ecosystems have their own inherent limitations for use of ICT based tools. It can be said that though there have been many studies conducted on Himalayan glaciers the lack of baseline data poses as a major limitation in most of the cases. Continuous records for climate characteristics & meteorological observations are rarely available. In most cases there is no weather station at the high altitude locations. Rough terrain and harsh conditions make regular research more difficult

to be conducted. Also, complex interaction of spatial scales in weather and climate phenomena in mountains is not given sufficient importance at most of the times. In agro based ecosystems the use of ICT tools is relatively less complex as it does not entail large investments and monitoring of weather parameters can be undertaken with low cost methods and solutions. The need of the hour is to make use of modern tools such as satellite technology and weather stations and use the results for policy formulation on adaptation issues for the different ecosystem regions as well as catchment or watershed areas which are dependent on them. A multi disciplinary approach is required to integrate the ecosystem research in various sectors and across different stakeholders in order to promote sustainable growth models. Technology interventions require a paradigm shift in bringing societal benefits in the face of environmental stresses. While there have been some good examples of technology – academiacivil society interface in this direction, much needs to be done to bring the fruits of state of the art tools at the doorstep of large sections of society. The tremendous growth in telecommunication technologies has seen an increased economic growth and prosperity across many parts of the world. In countries like Bangladesh, the concept of Grameen phone has helped empower some of the rural populace to enable them to move into the mainstream of society. Future research trends are likely to focus at developing and implementing low carbon technologies particularly in the renewable energy sector. Decentralised rural energy generation from solar and bio mass power are being seen as solutions to a sustainable future. The recent national Action Plan on Climate change by the Government of India released in 2008 provides clear focus towards sectors like solar energy, energy efficient technologies and increasing capacity of

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all levels of stakeholders by strengthening their knowledge domain.

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CONCLUSION

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The coastal and mountain ecosystems are known to be one of the most productive ecosystems across the world harbouring a diverse range of floral and faunal elements. The range of ecological services generated by these ecosystems has tremendous implications for the well being of communities in sustaining local livelihood and strengthening sustainable development of the region. The increasing pressures being brought upon these regions as a consequence of unplanned development have already resulted in severe pressures for both local ecology and dependent communities. Future efforts in building the resilience of the local community and the ecosystems should take into account a visionary and integrated approach. A vision based approach therefore needs to be adopted as a sustainable growth model for society.

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“Ecosystems dependent communities and local economies need to be adapted for environmental impacts and supporting mitigation advocacy” As part of this process various stakeholders at multiple levels need to come together to address the issue of climate change and environment security. • • •

Local - Community level site-specific measures could be developed. National - Common consensus for national adaptation strategies. International - Supporting intergovernmental processes.

In the context of vulnerable ecosystems some of the stakeholder groups could include:

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Poor and vulnerable Ecosystem dependent communities (Agriculture, mountain and fisherfolk communities etc.) Decision making bodies at local, state and national levels Urban consumers Technology innovation and incubation groups Business and Industry Regulatory groups Scientists and Academic bodies

A multidisciplinary approach involving several stakeholders on a common platform can stimulate integration of environmental concerns in overall development planning process. Empowering stakeholders through collaboration could take the shape of establishing institutional processes with local civil society organisations and other stakeholders. Environmental stress and impacts are still relatively less understood and strengthening capacity through awareness generation is an important part of building resilience. (Report of 5th Convention of Grameen Gyan Abhiyan,2008) Coupled with other activities this involves promoting the role of grass roots level civil societies through development of resource centres and creating local knowledge networks to raise the level of local development planning. Technology development and technology enabled services play a major role in enhancing the resilience and capacity of society to prosper and achieve sustainable economic growth. Much of the future growth of society is likely to be centered on how we are able to adapt to these tools and services to the benefit of mankind. The internet revolution has already seen a tremendous change in shaping global economies and perhaps the world is now at the cross roads of using sustainable and innovative technologies to create a low carbon and environmentally friendly world.


REFERENCES Bureau of Meteorology, Australian Government. (2005). Automatic weather stations for agricultural and other applications. Cornett, Z. J. (1994). GIS as a catalyst for effective public involvement in ecosystem management decision making. In Sample, V. A. (Ed.), Remote sensing and GIS in ecosystem management. Washington, DC: Island Press. Dinesh Kumar, P. K., Gopinath, G., Laluraj, C. M., Seralathan, P., & Mitra, D. (2007). Change detection studies of Sagar Island, India, using Indian remote sensing satellite 1C linear imaging self-scan sensor III data. Journal of Coastal Research, 23(6), 1498–1502. doi:10.2112/05-0599.1 Finklin, A. I., & Fischer, W. C. (1990). Weather station handbook- an interagency guide for wildland managers. Publication of National Wildfire Coordinating Group. US Dept of Interior. Howard, C. C., Fuller, R. M., & Barr, C. J. (1996). Linking ecological information recorded from ground, air and space: Examples from countryside surveys 1990. Global Ecology and Biogeography Letters, 5. IPCC. (2007). Climate change 2007: Impacts, adaptation and vulnerability. Contribution of Working Group II to the Intergovernmental Panel on Climate Change. Cambridge, UK: Cambridge University Press. Kulkarni, A. V., & Bahuguna, I. M. (2002). Glacial retreat in the Baspa Basin, Himalayas, monitored with satellite stereo data. Journal of Glaciology, 48, 171–172. doi:10.3189/172756502781831601 Kulkarni, A. V., Mathur, P., Rathore, B. P., Alex, S., Thakur, N., & Manoj, K. (2002). Effect of global warming on snow ablation pattern in the Himalayas. Current Science, 83, 120–123.

Kumar, R., Hasnain, S. I., Wagnon, P., Arnaud, Y., Chevallier, P., Linda, A., & Sharma, P. (2007). Climate change signals detected through mass balance measurements on benchmark glacier, Himachal Pradesh, India. In Climatic and anthropogenic impacts on the variability of water resources (pp. 65–74). Technical Document in Hydrology No. 80. Paris, France: UNESCO. Montpellier, VT: HydroSciences. Loucks, C., Barber-Meyer, S., Hossain, M. A. A., Barlow, A., & Chowdhury, R. M. (2010). Sea level rise and tigers: Predicted impacts to Bangladesh’s Sundarbans mangroves. Climatic Change, 98, 291–298. doi:10.1007/s10584-009-9761-5 McGranahan, G., Balk, D., & Anderson, B. (2007). The rising tide: Assessing the risks of climate change and human settlements in low elevation coastal zones. Environment and Urbanization, 19(1), 17–37. doi:10.1177/0956247807076960 MS Swaminthan Research Foundation. (2008). Architecture of inclusive growth. Report of the 5th Convention of Grameen Gyan Abhiyan. Rossi, R. E., Mulla, D. J., Journel, A. G., & Franz, E. H. (1992). Geostatistical tools for modeling and interpreting ecological spatial dependence. Ecological Monographs, 62(2), 277–314. doi:10.2307/2937096 Roughgarden, J., Running, S. W., & Matson, B. (1991). What does remote sensing do for ecology? Ecology, 72, 1918–1922. doi:10.2307/1941546 Rupa Kumar, K., Sahai, A. K., Krishna Kumar, K., Patwardhan, S. K., Mishra, P. K., & Revadekar, J. V. (2006). High resolution climate change scenarios for India for the 21st century. Current Science, 90(3), 334–345. Sample, A. V. (1994). Remote sensing and GIS in ecosystem management. Washington, DC: Island Press.

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Schaefer,G. L.(2000). Automated weather stations for applications in Agriculture and water resources management: Current use and future perspectives. Sreedhar, G. V., Ramnaresh Kumar, V., Nagarajan, R., & Balaji, V. (2009). Improving micro-level drought preparedness using GIS-case study of Addakal Mandal. Information for Development, 7(3), 27–30. Stainforth, (2005). Uncertainty in predictions of the climate response to rising levels of greenhouse gases. Nature, 433, 403–406. doi:10.1038/ nature03301 WWF. (2005). An overview of glaciers, glacier retreat and its subsequent impacts in the Nepal, India and China. (p. 67). WWF international report.

KEY TERMS AND DEFINITIONS Ecosystem: A space or a system which allows dynamic interaction between plants, animals, microorganisms, life forms, and their environment working together as a unit for natural processes to function. Climate Change: Observed and projected increases in the average temperature of Earth’s

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atmosphere and oceans leading to changes in the earth’s climate due to anthropogenic factors and other causes. Traditional Knowledge: Knowledge gained through tradition or anecdote; historical information passed about social, cultural and environmental lore through legend. ICT: Term now widely used to cover all the computing and telecommunications in an institution, whether used for research, teaching or administration. Geographic Information System: As complex system of hardware and software technologies used for storage, retrieval, mapping, and analysis of geographic and spatial data. Innovation: A process of generating ideas and developing them into new or improved products, services, or business processes. Sustainable Development: To achieve a reasonable and equitable distribution of economic well being in society that can be perpetuated continuously for many human generations through use of natural resources in a renewable manner. Civil Society: A collective group of stakeholders comprising of civic, grass roots, and social service based organizations and citizens working outside the domain of the state in promoting a common good for society.

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Chapter 10

MSP430 Microcontroller: A Green Technology Mala Mitra PES School of Engineering, India

ABSTRACT In this chapter, the architecture and function of a microcontroller, a device for system operation control at micro-level, is briefed. The need for a low power microcontroller towards sustainability and greening is stressed with various examples. The MSP430 Microcontroller, a product from Texas Instruments, is a very low power microcontroller. The strategies adopted for MSP430 microcontroller power optimization are explained. Some emerging trends for further power optimization are also given. All the concepts are introduced in a simple manner with suitable analogies so that it can be understood by a reader with a different expertise.

INTRODUCTION What is a microcontroller? The name itself is self explanatory. Microcontroller (Mazidi, 2006) is a tiny integrated circuit chip that controls a system operation at the micro-level. For example, a microcontroller can be used to control the temperature of a furnace (Bogush 2006). Say, a furnace needs to be maintained at 1000 degree centigrade. When the temperature goes above 1000 the microcontroller DOI: 10.4018/978-1-60960-531-5.ch010

should be able to sense it. Then it should send a control signal that reduces the electrical power delivered to the heater element. The efficiency of a controller is decided by: (i) its speed. How quickly it brings back the desired temperature? (ii) its accuracy. What minimum temperature deviation it can sense and control? (iii) its control type. The control should not create a temperature oscillation. If the first control brings the temperature below 1000 and the second control shoots up the temperature above 1000 and if oscillation goes on like that it is very much undesirable. The


MSP430 Microcontroller

control should be such that it minimizes the deviation smoothly. A positive temperature deviation should remain positive throughout the control (Radakovic 2002). Microcontroller is a very efficient controller since it has all these attractive features of control. Microcontroller finds wide use in embedded systems (Kamal, 2003). To understand what Embedded System is, we begin with an example. Most of us use automatic washing machine to wash our clothes. A fully automated washing machine may automatically decide the quantity of detergent, water temperature, time for wash etc. (Yin-Win, 2009). These decisions will be made by a microcontroller or a similar processor that is embedded inside the washing machine. Though there is a computing machine inside the washing machine none thinks of doing some computation with the help of a washing machine. Microcontroller is used to make the machine automatic but it still washes clothes and does not function like a computer. For this reason the microcontroller is looked as an embedded system for the washing machine. Embedded system can be defined as a system with electronic processing capability that is embedded in equipment whose primary task is different from electronic processing. A desktop computer has a microprocessor inside it to endow it with computing or electronic processing capabilities. But this microprocessor cannot be called an embedded system, as desktop computer is primarily used for computing i.e. its primary task is quite similar to the microprocessor. Microcontrollers are good candidates for real time applications. In a real time application the processor should be ready to accept the input at a particular instant and the output from the processor should be guaranteed after a definite time interval. If a delayed output means a disaster then the application is a hard real time application. An embedded system in a satellite launcher may generate specific outputs to control the speed at different instants. Failure to give this specific output at a specific instant shall end up in an un-

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Figure 1. Basic building blocks of a microcontroller

successful mission resulting in a heavy loss and damage. In this case, the application is a hard real time application. Embedded systems have a great market potential. While purchasing an equipment or device the customer asks for various automatic controls. A customer expects a smooth shaving without any cut in the skin from a safety razor. Proper use of embedded system in a razor may give this satisfaction. As the technology of embedded processor matures it finds more and more widespread applications. Now with the understanding of the role of a microcontroller with some specific examples, we can identify its basic building blocks and interfaces as given in fig. 1. The function of a microcontroller can be understood for the furnace temperature control discussed earlier. The block, I/O interface, interacts with the external world. The temperature of the furnace is received from a temperature sensor as an input and the control for the heater element is sent as an output through this interface. A microcontroller processes only binary numbers. A stream of 1s (usually high voltage e.g. 2.5 volts) and 0s (usually low voltage e.g. 0 volt) are received at the I/O. This stream can be received serially bit by bit or can be received through the parallel port. The temperature data is brought by the data bus to the Arithmetic Logic Unit or ALU and processed. A suitable algorithm executed in the ALU determines the heater control current.


The control data moves to the I/O through the data bus. If any result during data processing needs to be remembered that should be stored in the data memory. All the memories and I/O have addresses so that they can be uniquely selected through the address bus and then data can be moved through the data bus to the right memory location or I/O port. It is to be noted that, address bus is unidirectional. This shows that, ALU can select memory address and I/O port address. Whereas, data can be moved from ALU to memory or memory to ALU as the data bus is bi-directional.

NEED FOR LOW POWER Is there any need for power optimization of a microcontroller? Like any electronic device microcontrollers are low power device. In a system the maximum power consumption takes place for electrical machines. A dc motor may consume energy at kilo-Watts. Compared to the machine power a standard microcontroller consumes only milli-Watt power. We can conclude that, in a controlled system the power consumed by the microcontroller is negligible. If a standard microcontroller consumes almost zero power then what is the point to further minimize the power? Rather we should try to optimize the electrical machine power used in the system. Considering specific examples we shall show that, at times a small reduction in microcontroller power reduces the power consumption of the electrical machine used in the system. Following points justify the need for a low power microcontroller.

Object in Motion Consider a tiny robot that moves on wheels. These wheels are powered by 2 motors. There are 10 in-built microcontrollers to sense environment and to control movement. Each unit has a power rating of 100 milli-Watt. Total power consumption becomes 1.2 Watts. To deliver this power an

in-built heavy storage battery is required. Motors with low ratings cannot carry this heavy load and should be replaced by heavy rating motors. Now the motors need a heavier battery which in its turn needs higher power motors. Thus, the system enters into a vicious circle. On the other hand if these standard microcontrollers are replaced by low power microcontrollers with power rating of 1 micro-Watt the system power consumption sums up to 0.20001 Watts or 200 milli-Watts approximately. This power can be delivered by a very light-weight battery.

Passive or No Battery Devices Radio Frequency Identification Devices (Agarwal, 2006) tags or RFID tags can be passive. Passive tags have a very long life. If there is no wear and tear it may work for ever. The tag functions when it extracts power from the detector or interrogator. Thus the tag power is limited and this may limit the functionality of the tag. For information privacy, cryptography or secret coding must be done on the information sent by the tag (Stallings, 2003; Mitra 2008). Cryptography is computationally intensive and must function with the limited power of the tag. Chae (2007) has shown that information security can only be provided when an ultra low power microcontroller MSP430 (Davies, 2008; MSP430 documents webpage, 2010) a product of Texas Instruments is used.

Use of Unconventional Energy Sources Many unconventional energy sources e.g. solar energy, wind power energy, vibration energy have been identified. These are not widely used as the power delivery capabilities of these sources are very poor. These energy sources can be tapped for an ultra low power microcontroller. Consider a wireless sensor network (Sonavane, 2009) that is used to prevent unauthorized tree cutting in a dense forest. The sensor attached to the tree may

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detect any unusual vibration and sends a wireless signal to the monitoring tower. To decide whether the vibration is for tree cutting, damaging the sensor or a casual one the vibration data is processed by a microcontroller. MSP430 microcontroller is a popular choice for this system as this has a wireless capability. These ultra low power microcontrollers can utilize unconventional energy sources e.g. wind energy. These microcontrollers are expected to work for ever as the life of the product is not limited by the battery power. The total energy consumption for a prolong use is appreciable though it is ultra low power. Replacement of a battery with unconventional energy saves this power.

Cooler Systems Consider a refrigerator that uses microcontroller for inside temperature control. It also analyzes the quality of the stored food items. With any indication that a food item is getting spoiled the microcontroller sends a wireless signal and a message to the mobile phone. An ordinary microcontroller shall consume heavy power while sending the wireless signal. For this the inside temperature may fluctuate. Fluctuation of temperature needs a temperature control and that will hike the power consumption and hence temperature fluctuations. Thus the system enters into a vicious circle for increased power consumption and temperature fluctuations. MSP430 with wireless capability consumes a little power and temperature fluctuation is unlikely. Here, also unconventional energy sources can be used. It has been demonstrated that, an MSP430 microcontroller can function by extracting energy from an apple stored inside the refrigerator.

Office or Home Automation If you unscrew any automated machine at office or home you will find several microcontrollers

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inside the machine. Though the power consumption in a standard microcontroller is negligible the total power consumption by all the microcontrollers used for office or home automation is quite appreciable. Replacement of these ordinary microcontrollers with ultra low power MSP430 can save an appreciable amount of power. Efficient power utilization of MSP430 results in a negligible ambient heating. This does not load the air-conditioner as well. These are some examples where system power comes down with judicious use of MSP430 microcontroller. The next section discusses some strategies which endows MSP430 with ultra low power consumption feature.

STRATEGIES FOR LOW POWER In any device design, when low power is achieved the speed or performance goes down. It can be shown that, for an “Integrated Circuit Chip” or IC there is a trade off among speed, power, chip area, noise, functionality, cost etc. (Razavi, 2002). The innovative architecture of MSP430 shall be discussed in this context. Though this microcontroller consumes negligible power its other features are comparable to the existing microcontrollers available in the market. We can say that, MSP430 manifests sustainability. Sustainability can be defined as meeting the need of the present generation without compromising the ability of future generations to meet their needs. MSP430 meets the present needs of speed or performance etc. We know that, free or available energy is reducing with each task we perform. Use of low power or low energy means helping the next generations to meet their energy needs. The low power technology is an environment friendly technology and may be called as a green technology. Following gives some of these strategies that optimize the power while maintaining the other features.


Use of Sleep Modes MSP430 Microcontroller optimizes its efficiency by sleeping in-between its active states. To understand how efficiency can be increased by sleeping we take an analogy. Suppose a group of students utilize the class hours very efficiently. They go for catnap, slumber or a deep sleep depending on the situations. Instead of waiting for the teacher’s turn-up they go for a catnap. As soon as the teacher appears they get up and give a warm welcome to the teacher. When the roll-call goes on they go for deep sleeps. A student wakes up and responds only when her roll number is called. As teaching starts they wake up and fully concentrate. When a problem is given to these students they solve it fast. While the remaining students solve the problem they go for a slumber. All the teachers who encourage unconventional but fruitful ideas shall definitely accept this one. Like these students an MSP430 microcontroller goes for a sleep when there is no activity. There are some applications where long inactive period prevails. There can be a burst of activities for a short period. Consider a robot in a factory whose task is to detect and control fire. Fire does not break everyday. The robot happily sleeps. When it detects smoke due to fire it wakes up instantaneously. It senses the temperature and uses the appropriate fire extinguisher. After extinguishing the fire again it goes for a sleep. MSP430 is ideal for this type of applications. For it, sleep means some of the parts of the chip become temporarily inactive and consume no power. It has several sleep modes. Depending on the task at hand it may go for a burst of activities. After task completion it selects one of the most suitable sleep modes.

Use of Suitable Clocks The task of a microcontroller is synchronized to the tick of a clock. MSP430 uses different types of clocks. The power consumption of an accurate

and high resolution clock is very high. If such accuracy is not needed for a particular task the accurate clock is replaced by an inaccurate, low resolution and low power clock.

Single Chip Solution Other than the standard blocks of a Microcontroller shown in figure 1, MSP430 has additional blocks giving additional capabilities. It can sense analog voltages. A conventional microcontroller can sense only digital signals in the form of 1011---. Sensor outputs are normally analog in nature. To interface the sensor to the I/O there should be one Analog to Digital Converter or ADC chip in between. Instead of using an additional ADC chip the block is provided in the MSP430 chip itself. These eliminate the power dissipation in the wires or metal lines on a PCB connecting the two chips. It also provides Digital to Analog Converter or DAC, operational amplifiers different sensors on a single chip (Baker, 2002; Bell, 2007; Gray, 2001; Sze, 1981).

NEED FOR UNDERSTANDING The efficiency of MSP430 is fully manifested when the attractive features are fully utilized. For this reason a user or a programmer should understand how MSP430 works as a low power yet high speed microcontroller. Suppose a programmer is developing a code for the fire fighting robot. The program flow of figure 2 (a) is an inefficient one. Here the microcontroller waits for the smoke. The wait is likely to be a long patient wait. As it remains fully active, power consumption is almost as high as an ordinary microcontroller. In the power saving program flow shown in figure 2 (b) the microcontroller sleeps when there is no task. This is likely to be a long deep sleep and enormous amount of power gets saved.

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Figure 2. Program flow for a fire fighting robot. (a) Inefficient program. (b) Efficient program

FUTURE RESEARCH DIRECTIONS If we study the product family of MSP430 we observe that, recent versions are tailor made for a particular application class. If that application needs to monitor humidity a humidity sensor shall be included in the chip and a single chip solution shall be provided. A new idea has come up for dynamic power minimization for CMOS circuits (Weste, 1993) used in microcontroller. In a CMOS circuit if voltage at any node makes a transition from high to low or low to high the capacitor attached to the node discharges or charges respectively through a resistor. The current through the resistor generates heat and power loss takes place. For this reason the voltage change at a node should be minimized.

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When represented as a binary number a node holding a bit 1 should be allowed to hold a bit 1. Suppose in a particular application the data are read from consecutive memory locations. These memory addresses shall be placed in the address bus one after another. Table 1 gives the sequence of numbers tabulated as binary address with natural encoding. We can observe that, the 1-0 transition is at one place when 2nd address is placed at the address bus. But for the third address there are changes for two bit positions and dynamic power dissipation gets doubled. To minimize this power dissipation gray encoding (Yeap, 1998) given in the last column may be adopted. In this encoding technique number of transitions for consecutive address is always 1.


Table 1 Binary numbers placed in the address bus for consecutive addressing Â€Â€Â€Â€Â€ Hexadecimal Address

Â€Â€Â€Â€Â€Binary Address with Â€Â€Â€Â€Â€natural encoding

Â€Â€Â€Â€Â€gray encoding

Â€Â€Â€Â€Â€00

Â€Â€Â€Â€Â€00000000

Â€Â€Â€Â€Â€00000000


Â€Â€Â€Â€Â€00000001

Â€Â€Â€Â€Â€00000001


Â€Â€Â€Â€Â€00000010

Â€Â€Â€Â€Â€00000011


Â€Â€Â€Â€Â€00000011

Â€Â€Â€Â€Â€00000010

and can decide for speed and power consumption. With a judicious programming, MSP430 shows a burst of activities and sleeps in-between. Thus it consumes a very low average power and tasks of high priority are done at a great speed. The other attractive features include use of multiple clocks of different power. It also provides a single chip solution and eliminates the power loss at the interfaces.

CONCLUSION

REFERENCES

In this chapter, the basic architecture and function of a microcontroller is discussed. With examples, the need for low power microcontroller is illustrated. Microcontrollers are of prime importance for electronic control and communication of any modern appliance. Any household appliance e.g. washing machine, refrigerator, air-conditioner or office appliances e.g. electronic printer, Photostat copier, fax machine contains one or more microcontrollers. Because of its bulk usage a marginal saving in power for one MSP430 results to enormous saving as a whole. In any device design, when one feature is optimized another feature degrades. When low power is achieved the speed or performance may go down. The innovative architecture of MSP430 shall be discussed in this context. Though this microcontroller consumes negligible power its other features are comparable to the existing microcontrollers available in the market. MSP430 can function in different modes ranging from a high speed, high power to a low speed, low power mode. With lots of urgent tasks in hand it goes to high-speed, high-power mode. With a not so urgent task it can move to moderate-speed, moderate power mode. With no task it comes down to the lowest power mode. This is a deep sleep mode where negligible power is used to monitor the wake up call. A programmer can select a mode

Agarwal, A., & Mitra, M. (2006). RFID: Promises and problems. Techonline. Retrieved June 08, 2010, from http://www.techonline.com Baker, R. J. (2002). CMOS: Circuit design, layout, and simulation. Wiley. Bell, D. A. (2007). Electronic devices and circuits. India: Prentice Hall of India. Bogush, M. V., Kuz’minov, I. I., & Yu Orlov, S. (2006). Microcontroller-based system for controlling annealing in bell-type furnaces. Metallurgist Journal, 50, 148–151. .doi:10.1007/s11015-0060055-0 Chae, H., Yeager, D. J., Smith, J. R., & Fu, K. (2007). Maximalist cryptography and computation on the WISP UHF RFID tag. Paper presented at the Conference on RFID Security 2007, Malaga. Retrieved June 08, 2010, from http://seattle.intelresearch.net/~jrsmith/WISP-RFIDSec07.pdf Davies, J. H. (2008). MSP430 microcontroller basics. Burlington, MA: Newnes, Elsevier. Gray, P. R., Hurst, P. J., Lewis, S. H., & Meyer, R. G. (2001). Analysis and design of analog integrated circuits. New York, NY: John Wiley. Kamal, R. (2003). Embedded systems: Architecture, programming and design. New Delhi, India: Tata McGraw-Hill.

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Mazidi, M. A., Mazidi, J. G., & Mckinley, R. D. (2006). The 8051 microcontroller and embedded systems using assembly and C. New Delhi, India: Pearson Education. Mitra, M. (2008). Privacy for RFID systems to prevent tracking and cloning. International Journal of Computer Science and Network Security, 8, 1–5. doi:.doi:10.1109/MPOT.2007.913680 MSP430. (2010). Documents and tools at Texas Instruments website. Retrieved June 08, 2010, from http://www.ti.com/msp430 Radakovic, Z. R., Milosevic, V. M., & Radakovic, S. B. (2002). Application of temperature fuzzy controller in an indirect resistance furnace. [INSERT FIGURE 001]. Applied Energy, 73, 167–182. .doi:10.1016/S0306-2619(02)00077-6 Razavi, B. (2002). Design of analog CMOS circuits. New Delhi, India: Tata McGraw Hill. Sonavane, S. S., Kumar, V., & Patil, B. P. (2009). MSP430 and nRF24L01 based wireless sensor network design with adaptive power control. ICGST-CNIR Journal, 8, 11–15. Stallings, W. (2003). Cryptography and network security: Principles and practices. New Delhi, India: Pearson Education. Sze, S. M. (1981). Physics of semiconductor devices. India: Wiley. Weste, N. H. E., & Eshraghian, K. (1993). Principles of CMOS VLSI design: A systems perspective. In Conway, L., & Seitz, C. (Eds.), The VLSI systems series (pp. 231–238). India: Pearson Education. Yeap, G. (1998). Practical low power VLSI design. Boston, MA: Kluwer Academic Press. Yin-Win, L., Khaing, P. H., & Latt, M. M. (2009). Design considerations for microcontroller based process control for washing machine. In 2009 International Conference on Digital Image Processing, (pp. 122 – 126), Bangkok. doi: 10.1109/ ICDIP.2009.22

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ADDITIONAL READING Ayala, K. J. (1997). The 8051 Microcontroller Architecture, Programming and Applications. New Delhi: Thomson Learning. Baugh, T. (2008). MSP430 State Machine Programming: with the ES2274. USA: SoftBaugh. Kant, K. (2007). Microprocessors and Microcontrollers: Architecture, Programming and System Design, 8085, 8086, 8051, 8096. New Delhi: PHI Learning. Negy, C. (2003). Embedded Systems Design using the TI MSP430 Series, Newnes. USA: Elsevier. Po, S. N. G., Dagang, G., Hapipi, M. D. B. M., & Francis Tay Eng Hock, F. T. E. (2006), MEMSWear – Biomonitoring — Incorporating sensors into smart shirt for wireless sentinel medical detection and alarm, International MEMS Conference. In Journal of Physics: Conference Series, Vol. 34, (pp. 1068–1072). Rahane, S. B. (2010). An ultra low powered MSP430 microcontroller based control system for a composting. International Journal of Computers and Applications, 1, 65–68. doi:10.5120/321-489 Wang, C., Hsiao, H., & Huang, C. (2009). Development of MSP430-based ultra-low power expandable underwater acoustic recorder. Ocean Engineering, 36, 446–455. doi:10.1016/j.oceaneng.2009.01.008 Zhang, Y. (2010), Design of Low-Power Wireless Communication System Based on MSP430 and nRF2401, Int. Conf. on Measuring Technology and Mechatronics Automation, Changsha, China.

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Chapter 11

Toward a Conceptual Model for Sustainability and Greening through Information Technology Management A.T. Jarmoszko Central Connecticut State University, USA Marianne D’Onofrio Central Connecticut State University, USA Joo Eng Lee-Partridge Central Connecticut State University, USA Olga Petkova Central Connecticut State University, USA

ABSTRACT This study describes a conceptual approach to greening and sustainability through Information Technology management. The authors reviewed existing research and publications on the topic of greening, and concluded that while much has been written about ways to go green, much less are available on guidelines to help gauge the degree of greening efforts. To help alleviate this shortcoming, the authors propose a model–called the Greening through Information Technology Model (GITM)–based on the framework of Capability Maturity Model. The authors are currently in the process of developing questions to be used for each aspect of the greening management to determine the GITM level that an organization is in.

INTRODUCTION Even though the financial crisis of recent times has served to deemphasize the urgency global DOI: 10.4018/978-1-60960-531-5.ch011

greening and sustainability, the issue is likely to return in the near future. The failure of the recently concluded Copenhagen Climate Conference has taught activists in this area some useful lessons (Dvorsky, 2010), which are likely to help in creating alternative strategies for change. As the


Toward a Conceptual Model for Sustainability and Greening through Information Technology Management

world leaders grapple with redefining the rules for global finance, another way to move forward policies that promote greening and sustainability is to concentrate on bottom-up initiatives. Toward this end, the authors of the study described below have chosen to focus on a relatively small area affecting global climate change: that of managing Information Technology. Even a perfunctory review of literature shows that many an IT manager have undertaken to increase employee awareness of greening and sustainability issues, and have worked to put in place policies and procedures to enhance both outcomes. However, a more thorough review of literature points to problems and shortcomings. For example, there appears to be no widely acceptable framework to help gauge the degree of organizational greening efforts. How are managers to know, how well they are doing in this area? To help alleviate this shortcoming, we propose a model – called the Greening through Information Technology Model (GITM) – based on the framework of Capability Maturity Model. To be sure, ours is not the only effort to help IT managers in their greening programs. For example, consultants at Accenture have built one model – called Green Maturity Assessment (GMA) – for assessing greening efforts of an Information Technology organization (available at www.accenture.com/gmm). That model produces a greening effort rating, based on a series of questions the responses to which are Likertscale answers from strongly disagree to strongly agree. Even though the authors of this paper were not aware of GMA’s existence when GITM was being developed, one could see GMA and GITM as complementary in focus and range.

BACKGROUND: SUSTAINABILITY AND GREENING The terms sustainability and greening are often used interchangeably; however, the terms are not synonymous. The topic of sustainability has

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been of interest to various disciplines for many years and as a concept has had many definitions. In a general sense, sustainability is the ability to maintain a certain process or state indefinitely. In recent years, the concept has been applied to living organisms and systems. When applied to the human community, the most widely accepted definition has been that proposed by (Brundtland, 1987) who defines the concept of sustainability as “meeting the needs of the present generation without compromising the ability of future generations to meet their needs.” The interdependency of nations requires that sustainability become the goal of all nations if the needs of present and future generations are to be met. Sustainability is a multifaceted concept. It rests on three pillars: the economy, the environment, and society. Thus, the achievement of sustainability requires interventions in these three areas. Greening is one aspect of sustainability which typically focuses on environmental measures (Ivanovich, 2008). Efforts to recycle and reuse materials, to reduce if not eliminate toxic components or to responsibly design products or industrial processes are examples of greening policies. Even though the concept of greening is not immediately connected to costs, greening is often about reducing consumptions and therefore reducing costs. Greening requires interventions by both governments and organizations. From this perspective, governmental actions through legislation, regulations, and executive orders can provide a top-down approach to impact the achievement of greening and sustainability while organizations by greening through IT management can provide a bottom-up approach to implement governmental actions (Figure 1). One area within organizations which appears ripe for greening is that of technology. While information technologies are critical to the operation and success of today’s businesses, these same technologies are also often seen as a cause of environmental burden (Boudreau, Chen, &


Figure 1. Top-down and bottom-up approaches to greening

In the sections of the paper that follow, the authors briefly report on their review of literature to date concerning the roles of government and organizations in greening; the state of greening in organizations reporting best practices; and their work in progress to develop a model for assessing an organization’s maturity level in greening. The model, Greening through Information Technology Management (GITM), is adapted from the Capability Maturity Model. The authors then propose a tool (the GITM tool) to facilitate implementation of the model.

GOVERNMENT’S ROLE IN SUSTAINABILITY AND GREENING

Huber, 2008). The authors of this paper purport that through the management of Information Technology (IT), organizations can facilitate greening and, thus, move toward sustainability.

GREENING THROUGH INFORMATION TECHNOLOGY MANAGEMENT In this research project, the authors have investigated programs of applying greening policies to many aspects of organizational function, as it pertains to IT management. These aspects include assets, power, and personnel. All three aspects of organizations are heavily impacted by information technologies. For example, power is consumed and generated by technology; organizations’ assets include multiple technologies which need to be purchased/reused/retired; and personnel use information technologies.

Research indicates that the European community has been proactive and is a leader in greening through its laws and regulations. In contrast, the United States has been somewhat of a laggard, being reactive and a follower (Kanter, 2009). Some efforts are underway to marshal the forces of U.S. government agencies and organizations in working toward sustainability and greening. For example, in November, 2008 the U.S. Small Business Administration’s Small Business Innovation Research program held a conference, bringing together scientists, manufacturers and entrepreneurs with representatives of various federal agencies to address topics such as next generation energy innovation. It was reported that the Federal government is providing monetary and technical support to public-private partnerships that will drive technological innovation in the future.

SUSTAINABILITY AND GREENING IN ORGANIZATIONS While governmental attempts at promoting sustainability and greening are important, the execution of plans lies with organizations. Information

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Technology is an inseparable component of any organizational environment. The availability and use of information systems and technologies has grown almost to the point of being a commodity. As such, the management of Information Technology resources is very important in order to ensure that organizations contribute to the worldwide efforts of sustainability and greening. There are hundreds of approaches that could be qualified as “green” organizational IT practices. For the purpose of this study, the authors divide them into three major streams: asset, power and personnel management.

Asset Management According to the International Association of Information Technology Asset Management (IAITAM), IT asset management (ITAM) is the set of business practices that join financial, contractual and inventory functions to support life cycle management and strategic decision making for the IT environment. Assets include all elements of software and hardware that are found in the business environment. By channeling the procurement process toward purchasing environmentally friendly IT products and by managing the usage of these products, organizations could contribute greatly to the power consumption reduction. By expanding the life cycle of the products and disposing wisely the used products, organizations can limit their contribution to the creation of environmentally threatening landfills. Hardware asset management is of utmost importance in dealing with environmental issues. Hardware asset management entails the management of the physical components of computers and computer networks, a time frame that spans the acquisition process through to the disposal of components. Common business practices include procurement management, utilization management, and disposal management.

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Procurement Metrics such as Energy Star (ES) and EPEAT (Electronic Product Environmental Assessment Tool) allow organizations to determine which products qualify as most environmentally-friendly and to review the comparative environmental impact of competing products (GEC, 2007) and (EnergyStar, 2009). One of the most popular initiatives used in organizational IT purchasing practices is the acquisition of Energy Star (ES) products. Initiated in 1992 by the United States Environmental Protection Agency as a voluntary labeling program to identify and promote energy efficient products, the Energy Star Program began with labels for computer products. As of 2006, more than 40,000 Energy Star products are available in a wide range of items including major appliances, office equipment, lighting, home electronics, and more. The EPA estimates that it saved about $14 billion in energy costs in 2006 alone. Another initiative, utilized widely by purchasers in the public and private sectors, is the use of EPEAT (Electronic Products Environmental Assessment Tool) registered products. EPEAT is a system for evaluating, comparing and selecting desktop computers, notebooks and monitors based on their environmental attributes. EPEAT also provides a clear and consistent set of performance criteria for the design of products and provides an opportunity for manufacturers to secure market recognition for efforts to reduce the environmental impact of their products. In the process of purchasing Information Technology products, many organizations use the Electronics Environmental Benefits Calculator (EEBC) to calculate the specific environmental benefits from the purchase of EPEAT registered computers and monitors. The Electronics Environmental Benefits Calculator (EEBC) was developed by the University of Tennessee Center for Clean Products to assist organizations in quantifying the positive effects of making “green” decisions when


using, reusing, or recycling electronic devices such as computers, monitors, and cell phones. The EEBC is available to any organization interested in determining the benefits of their own electronics stewardship activities.

Utilization and Disposal In order to be environmentally friendly and green, the utilization of Information Technology products in any organization should be aimed at maximizing the life of the product and minimizing the energy used by the product. Sanitizing data and refurbishing computers for reuse within the same organization is a practice used by many organizations. At the end of the Information Technology products’ life cycle, the products must be disposed of responsibly by organizations. The approach towards disposing of electronic waste (E-waste) provides a marked difference between environmentally responsible and environmentally irresponsible companies. As stated earlier, organizations are the entities that act on governmental legislations in greening and sustainability. For example, the WEEE (Waste Electrical and Electronic Equipment) Act was approved in 2003 in the European Union and is currently being implemented in all countries of the European Union. Also, the EPR (Extended Producer Responsibility) Act has been implemented requiring European sellers and manufacturers to recycle 75% of the products sold. In the United States, the White House Task Force on Waste Prevention and Recycling, in conjunction with the Environmental Protection Agency (EPA) of the U.S., has been working on the National Computer Recycling Act since 2005, but this act has yet to be approved. Currently, there is no national legislation that governs the disposal of e-waste in the United States. Some states, however, have taken the initiative to provide some guidelines on e-waste. The Californian Electronic Waste Recycling Act of 2003 is the first example.

This act leaves the initiative and the responsibility for recycling and disposal in the hands of the manufacturers and the organizations using the Information Technology products.

Power Management Energy consumption of Information Technology within the organization can be better managed by reducing power consumption of individual computers and data centers and by implementing innovative technologies such as virtualization.

Individual Computer Power Management A typical desktop system is comprised of the computer itself (the CPU or the “box”), a monitor, and a printer. Typically, the power usage of an individual system can range from 250 to 350 watts. The CPU may require approximately 100 watts of electrical power, the monitors 50-150 watts, and the printer 5-100 watts. Even in the idling mode, a computer uses up energy.

Data Center Power Management Data centers consume an enormous amount of energy. According to an August 2007 report released by the U.S. Environmental Protection Agency (EPA), in 2006 the electricity use attributable to the nation’s servers and data centers was estimated at about 1.5 percent of total U.S. electricity consumption (EnergyStar, 2007). Any attempts to reduce the use of energy consumption in data centers would significantly enhance the greening efforts of an organization. One such effort is to consolidate an organization’s disparate data centers into a single environment. Another way of increasing energy efficiency is to make a physical server perform the role of multiple servers. This is made possible by the concept of virtualization which allows multiple virtual servers to run on one physical server,

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regardless of the platform. By streamlining the number of physical servers, floor space is reduced. Cooling and capital costs are also reduced. Similar to consolidation, virtualization efforts are often undertaken with a business continuity benefit in mind, and these benefits are far-reaching. While the green benefits are often not the initial business driver in implementing virtualization technology, they can serve as an added incentive for funding and implementation.

Personnel Management While organizations may focus their enterprise efforts on asset and power management, they should not overlook the impact of individual personnel management. Through inculcating a personal green IT culture and promoting telecommuting (where possible), organizations can also work towards sustainability through greening.

Telecommuting Telecommuting is defined as working from home or from a remote site. One of the causes for carbon emission is the increased traffic congestion. John Edwards estimated that “for every 1 percent reduction in the number of cars on the road there’s a 3 percent reduction in traffic congestion” (Samson, 2007). Technologies such as wikis, discussion boards, and web conferencing tools have made it possible for individuals to interact online in real-time. Use of these technologies reduces the need for unnecessary employee travel, decreasing the amount of fuel emission. It is estimated that if everyone who was able to telecommute did so for just 1.6 days per week, there would be a savings of 1.35 billion gallons of fuel (National, 2006).

Personal Green Culture As stated in the discussion of power management, energy consumption of individual computing devices is not insignificant. By encouraging individu-

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als to take pride in implementing organizational initiatives for green IT, the organization benefits not only in cost savings through reduced energy consumption but also a greener environment. For example, assuming the energy cost of $0.16 per kilowatt hour, the annual electrical cost is over $250 per 200 watt PC system running continuously. By having computers turned to “sleep mode” when they are not in use, the EPA estimates that energy consumption would be reduced by as much as 70%. Furthermore, by operating computers 40 hours a week savings of $190 per computer per year would result. Reducing printing is also another way to reduce energy use.

TOWARD DEFINING A MODEL FOR GREENING THROUGH INFORMATION TECHNOLOGY MANAGEMENT (GITM) In an effort to help organizations better manage their IT greening efforts, the authors are in the process of developing a model. This model, the Greening through Information Technology Management (GITM) Model is based on the Capability Maturity Model (CMM), created in early 1990s in response to what was then called the software crisis (M. C. Paulk, Weber, Curtis, & Chrissis, 1995), (Fitzgerald, 1996), (Mathiassen & Sorensen, 1996). The model could be used to help organizations identify their level of IT greenness based on implementation of green-oriented processes. The original definition of CMM consisted of 5 levels: 1) Initial, 2) Repeatable, 3) Defined, 4) Managed, and 5) Optimizing. These levels were conceived specifically for the software development environment and therefore contain elements that are best suited for that area. Level 1 (Initial) is applicable to system development projects which follow no prescribed process. Level 2 (Repeatable) is used to describe project management processes and practices established to track costs, schedules,


Figure 2. Original CMM levels

and functionality. Level 3 (Defined) is referred to software development efforts in which a standardized system development methodology is used on all system projects. Level 4 (Managed) refers to those software development organizations which are able to establish and monitor measurable goals for quality and productivity. Finally, in level 5 (Optimizing), the chosen standardized system development process is continuously monitored and improved based on measures and data analysis established in Level 4.

Applying the Capability Maturity Model Although CMM is mostly known for its application to organizational software development, historically, there have several efforts to apply the Capability Maturity Model to other areas of organizational and IT activity. For example, Curtis, Hefley, & Miller (2002), have applied this approach to managing human resources and have called it People CMM, Niessink et al. (2005) have used to improve the management of IT services, and the National Association of State Chief Information Officers (NASCIO) (2003) has used it to work toward improving IT architecture. The unifying concept behind all of these efforts is the notion of systematic and progressive capability

improvement based on continuous attempts to enhance existing processes and bring them ever closed to some optimized level. Other efforts to apply the CMM have produced conceptual frameworks with different emphases and level monikers. For example the People CMM (see above) consists of Initial, Managed, Defined, Predictable and Optimizing levels. As is true for all models, even though they all fall short of accurately depicting reality, the choice of descriptors is critical for the function of communicating meaning. Consequently, GITM departs from the original number of levels and level names.

Identifying Key Process Areas, Goals and Practices CMM authors – in addition to delineation of process levels – have also conceptualized a tool to aid organizations in analysis and planning of CMM implementation. Figure 3 portrays this tool. Maturity Levels contain Key Process Areas which are organized by Common Features, which in turn contain Key Practices. Maturity levels indicate process capability; key process areas achieve goals; common practices address implementation or institutionalization; and key practices describe the infrastructure or activities.

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Figure 3. CMM Planning Tool [based on (Mark C. Paulk, Weber, & Chrissis, 1993)]

CHARACTERISTICS OF GITM 1.0

GITM Level 2: Defined

GITM Level 1: Awareness

Organizations at GITM Level 2 have crossed the passive-active boundary onto the active side. They have decided to begin examining their processes and defining and redefining them for greening through IT management. In other words, these organizations have clearly started to look at what can be done and have also taken concrete steps to implement identified changes. The extent to which Level 3 is attained can be elucidated by the comprehensive nature and the completeness of definition efforts. For the authors of this study, this means examining existing greening policies as they pertain to asset, power and personnel management, as well as to their constituent components (Figure 4). Following the paradigm suggested by the CMM Planning Tool (Figure 3), a useful exercise is to determine the Common Features that organize Key Process Areas and contain Key Practices. Paulk et al. (1993) list five Common Features in context of their discussion on applying CMM to software:

Corresponding to the CMM Level 1 (Initial), GITM maturity at this point is called Awareness. The existence of the level is predicated on the notion that, before action commences, organizations must go through a phase of consciousness raising. The knowledge about the effects of carbon gases on earth’s atmosphere and on related longterm problems if nothing is done, should reach all strata of the organization. At GITM level 1, organizational leaders recognize that greening through IT management is an important issue, in which their organization must take part. Understandably, the level of GITM awareness – in and of itself – could have a number sub-levels. Just knowing something and having extensive depth and breadth of knowledge could, qualitatively, be very different things. Nevertheless, at this level knowledge is, by definition, passive and does not lead to action no matter how deep and profound it may be.

1. Commitment to perform 2. Ability to perform

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Figure 4. GITM Key process areas

Figure 5. Waterfall vs. iterative approach

3. Activities performed 4. Measurement and analysis 5. Verifying implementation In applying GITM, organizations should delineate these Common Features in all Key Process Areas, so that specification of Key Practices could be determined. Within each Process Area, a detailed identification of Key Practices is likely to be dependent on specific organizational settings.

GITM Level 3: Managed Once programs, policies, and initiatives – in context of process definition and redefinition – have been put in place, the next logical step is to focus on measuring the effects of what is being done. Management of the greening efforts becomes possible when performance is monitored and measured and when policies in response to observed results can be adopted and adapted. The intent here is to measure costs and benefits and to try to manage the efforts in an attempt to obtain the greatest greening bang for the resource buck. It should be made clear that a transition between Level 2 and Level 3 is not a one-way, waterfall progression. Identification of new greening processes can certainly be done well after Level 3 had already been achieved for older processes. This is akin to the “iterative” method of software development, in which going back to a previously

attained level is sometimes required to make long-term progress possible.

GITM Level 4: Optimized The distinguishing feature of Level 4 (Optimized) is the introduction of Total Quality Management (TQM) techniques to greening. This is about having an on-going, continuous effort to improve some aspect of the organization’s operation, production, or service activities. The intent is to create an organizational culture that goes beyond policies and programs, and in contrast to Level 3 becomes autonomous in its capability to initiate and execute. Level 4 could be treated as the nirvana level, toward which efforts are constantly expanded but the end of being completely optimized is never quite reached. This is a program that constantly addresses some issue that could be improved upon in a constant and continuous, circular, fashion. The organization is always looking for something to improve upon and this effort -- over time -- leads to tighter, more effective and more efficient processes that accomplish GITM goals of reduced waste and enhanced sustainability. (Figure 7)

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Figure 6. Transition from GITM managed to GITM optimized levels

Figure 7. GITM levels and their effects

tion and Disposal, organizational leaders would respond to questions relating to each category to determine the level of greenness. Based on the responses obtained, a rating for each category of Asset Management might be generated to guide the organization in what steps they next needed to pursue. As a result, an organization would be better prepared to determine ways to move towards sustainability by greening through IT management.

DIRECTIONS FOR FUTURE WORK

GITM TOOL Once the authors have refined the model, the next step is to develop a Greening Through Information Technology Management (GITM) Tool to facilitate implementation of the model. The tool would allow organizations to determine their level of greenness for each of the major categories of asset management, power management, and personnel management. For example, for Asset Management (Figure 8) which the authors have categorized as Procurement Management (Buying Green) and Utiliza-

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The authors are in the process of refining the model and developing questions for each part of the greening management aspect of the GITM tool. Once the questions are finalized, we would pilot the GITM tool with one or two organizations and use that to validate and modify our model. Next, we would want to develop a questionnaire that could be used to collect data from various organizations on their greening efforts. This would serve to further fine-tune our model which we hope would be used by organizations to gauge their greening efforts towards the sustainability of the organization.


Figure 8. Graphical representation of GITM tool for asset management

REFERENCES Boudreau, M., Chen, A., & Huber, M. (2008). Green IS: Building sustainable business practices. In Watson, R. (Ed.), Information Systems. Retrieved from http://globaltext.terry.uga.edu/ userfiles/pdf/Information%20Systems.pdf Brundtland, G. H. (1987). Our common future: Report of the World Commission on Environment and Development. Oxford. Curtis, B., Hefley, W. E., & Miller, S. A. (2002). The People Capability Maturity Model: Guidelines for improving the workforce. Reading, MA: Addison-Wesley.

Ivanovich, M. (2008). Sustainable semantics. Retrieved from http://www.csemag.com/ blog/1170000317/paost/370023037.html Kanter, J. (2009, September 28). Green Inc: E.U. alone and lonely on carbon. The New York Times. Retrieved from http://www.nytimes.com/2009/09/28/ business/energy-environment/28green.html?_ r=1&pagewanted=print M. C. Paulk, C. V. Weber, B. Curtis, & M. B. Chrissis (Eds.). (1995). The Capability Maturity Model: Guidelines for improving the software process. Reading, MA: Addison-Wesley Publishing Company.

Dvorsky, G. (2010). Five reasons the Copenhagen Climate Conference failed. Retrieved from http:// ieet.org/index.php/IEET/more/dvorsky20100110/

Mathiassen, L., & Sorensen, C. (1996). The capability maturity model and CASE. Information Systems Journal, 6(3), 195–208. doi:10.1111/j.1365-2575.1996.tb00013.x

EnergyStar. (2007). Report to Congress on server and data center energy efficiency: Public law 109-431. U.S. Environmental Protection Agency: Energy Star Program.

NASCIO. (2003). NASCIO Enterprise Architecture Maturity Model. National Association of State Chief Information Officers.

EnergyStar. (2009). Program requirements for computers, version 5.0. Energy Star. Fitzgerald, B. (1996). Formalized systems development methodologies: A critical perspective. Information Systems Journal, 6(1), 3–23. doi:10.1111/j.1365-2575.1996.tb00002.x GEC. (2007). The environmental benefits of the purchase or sale of EPEAT registered products in 2006. Green Electronics Council.

Niessink, F., Clerca, V., Tijdinka, T., & vanVliet, H. (2005). The IT Service Capability Maturity Model. Paulk, M. C., Weber, C. V., & Chrissis, M. B. (1993). Capability Maturity model, version 1.1. IEEE Software, 18–27. doi:10.1109/52.219617 Smith, R. H. (2006). National Technology Readiness Survey (2005/2006). Retrieved from http:// www.rhsmith.umd.edu/ces/pdfs_docs/NTRS2005-06.pdf

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Samson, T. (2007). Give telecommuting the green light. Retrieved from http://weblog.infoworld.com/sustainableit/archives/2007/06/ telecommuting_c.html

Paulk, M. C., Weber, C. V., & Chrissis, M. B. (1994). The Capability Maturity Model for Software. Software Engineering Institute. Terrabytes (2009). Green IT Guide: Terrabytes Consulting.

ADDITIONAL READING

Varon, E. (2008, March 13, 2008). The Greening of IT. The CIO Magazine.

Bate, R., & Kuhn, D. CurtWells, Armitage, J., Clark, G., Cusick, K., et al. (1995). A Systems Engineering Capability Maturity Model, Version 1.1. Technical Report CMU/SEI-95-MM-003: Software Engineering Institute/Carnegie Mellon University.

KEY TERMS AND DEFINITIONS

Campbell, L. (2009). The greening of telecommunications. Ovum. Retrieved from http://www. ovum.com/go/content/c,69730 Deloitte (2007). Green IT. The Fast-track to Enterprise Sustainability: Deloitte Consulting. Deutsch, C. (2007). Greening the supply chains of corporate America. International Herald Tribune, (November 6, 2007). Retrieved from http://www. atkearney.com/main.taf?p=1,5,1,198 Fisher, D. (2008). GE Turns Green. Forbes, (May 15, 2008). Retrieved from http://www.forbes.com/ forbes/2005/0815/080.html Fonda, D. (2005, Jul. 07, 2005). GE’s Green Awakening. Time. Hasbrouck, J., & Woodruff, A. (2008). Green Homeowners as Lead Adopters: Sustainable Living and Green Computing. Intel Technology Journal, 12(1), 39–48. doi:10.1535/itj.1201.04

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Capability Maturity Model: A tool initially developed to help in assessing the ability of software developers to perform tasks contracted to them by the US government. Later CMM, became a general-purpose tool for assessing software development capabilities. Energy Star: An international standard for energy efficiency in consumer products. First adopted by the US government in 1992, later also accepted by Australia, Canada, Japan, New Zealand, Taiwan and the European Union. EPEAT: Electronic Product Environmental Assessment Tool used designed to assist in the purchase of “green” computing systems. Greening: Greening is one aspect of sustainability which typically focuses on environmental measures. Information Technology: According to the Information Technology Association of America (ITAA): The study, design, development, implementation, support or management of computerbased information systems, particularly software applications and computer hardware. Sustainability: Meeting the needs of the present generation without compromising the abilityof future generations to meet their needs.

Section 3

Green Finance and Carbon Market

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Chapter 12

Price Relationships in the EU Emissions Trading System Julien Chevallier1 Université Paris Dauphine, France

ABSTRACT The European Union Emissions Trading Scheme (EU ETS) constrains industrial polluters to buy/sell CO2 allowances depending on a regional depolluting objective of -8% of CO2 emissions by 2012 compared to 1990 levels. Companies may also buy carbon offsets from developing countries, funding emissions cuts there instead, under a Kyoto Protocol Clean Development Mechanism (CDM). This chapter critically analyzes the price relationships in the EU emissions trading system. The United Nations Framework Convention on Climate Change (UNFCCC) delivers credits that may be used by European companies for their compliance needs. Certified Emissions Reductions (CERs) from CDM projects are credits flowing into the global compliance market generated through emission reductions. EUAs (European Union Allowances) are the tradable unit under the EU ETS. Besides, the EU Linking Directive allows the import for compliance into the EU ETS up to 13.4% of CERs on average. This chapter details the idiosyncratic risks affecting each emissions market, be it in terms of regulatory uncertainty, economic activity, industrial structure, or the impact of other energy markets. Besides, based on a careful analysis of the EUA and CER price paths, this chapter assesses common risk factors by focusing more particularly on the role played by the CER import limit within the ETS.

INTRODUCTION The Emissions Trading Scheme (ETS) is the EU’s flagship climate policy, forcing industrial polluters to buy/sell CO2 allowances above a preDOI: 10.4018/978-1-60960-531-5.ch012

specified emissions cap. Companies may cut the costs imposed on the industry by buying relatively cheaper carbon offsets from developing countries, funding emissions cuts there instead, under the Kyoto Protocol’s Clean Development Mechanism (CDM). As the latest Intergovernmental Panel on Climate Change (IPCC, 2007) report pointed out


Price Relationships in the EU Emissions Trading System

the huge potential for the growth of CO2 emissions and associated pollutants in non-Annex B countries of the Kyoto Protocol, this chapter critically analyses to what extent the link between the EU ETS and the CDM will contribute to cut CO2 emissions by 2020. As reviewed by Lecocq and Ambrosi (2007), the CDM is controversial. By contrast, this chapter does not consider some viewpoints that oppose or demand more reforms for the CDM. Instead, we adopt a financial market approach and detail the characteristic of emission assets stemming from the CDM. According to the article 12 of the Kyoto Protocol, projects under the Clean Development Mechanism consist in achieving greenhouse gases emissions reduction in non-Annex B countries. After validation, the United Nations Framework Convention on Climate Change (UNFCCC) delivers credits that may be used by Annex B countries for use towards their compliance position. Certified Emissions Reductions (CERs) from CDM projects are credits flowing into the global compliance market generated through emission reductions. EUAs (EU Allowances) are the tradable units under the EU ETS. Albeit being determined on distinct emissions markets, CERs and EUAs may be exchanged based on their representative trading unit. One CER is equal to one ton of CO2-equivalent emissions reduction, while one EUA is equal to one ton of CO2 emitted in the atmosphere. Besides, the EU Linking Directive2 allows the import of CERs into the EU ETS up to 13.4% of their compliance needs on average. The import limit is equal to 1.7 billion tonnes of offsets being allowed into the EU ETS from 2008-2020, that is, an absolute maximum of 50% of the depolluting effort fixed by the scheme will be achievable through the CDM. Overall, our results shed light on the importance of the link between the EU ETS and the CDM to foster investments in infrastructure technology in developing countries, thereby facilitating the transition to a low-carbon future.

The remainder of the chapter is organized as follows. First, we provide background information on the price development of EUAs and CERs. Then, we detail the idiosyncratic risks affecting each emissions market, be it in terms of regulatory uncertainty or economic factors. Based on a careful analysis of the EUA and CER price paths, we assess common risk factors by focusing more particularly on the role played by the CER import limit within the EU ETS. A brief summary concludes the chapter.

BACKGROUND In this section, we comment first on the price developments of EUAs and CERs. Primary CERs (pCERs, which are generated from the project in the developing country) have a delivery risk, while secondary CERs (sCERs, which have been sold on the secondary credits market) are already generated and issued by the CDM Executive Board, and are hence risk-free. The risks attached to primary CERs are linked to the United Nations’ “International Transaction Log” (ITL) connection, the import limit, and the performance for operating projects, to which we may add a high volume of registered projects, as well as registration and methodological risks for proposed projects. The risks attached to secondary CERs are the ITL connection, the import limit, and eligibility criteria to be met for transfer of a CER from one EU registry to another. In the exchange contract (sCER), the seller agrees to pay EUAs or cash in case of non-delivery. The CER and EUA price series in Figure 1 shows that we are in presence of correlated emissions markets. The CER-EUA spread presented at the bottom of Figure 1 represents arbitrage opportunities for traders who are able to identify pricing anomalies between the quoted spread price and the two emissions markets.3 The EUA spread over the secondary CER widened to nearly €10 in Figure 1, and was even higher for most primary

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Figure 1. EUA, CER, and EUA-CER Spread Prices. Source: European Climate Exchange

CER contracts. We may also observe that the CER-EUA spread varies in the range of €-1.5 on 20 November 2008, and has been as high as €-9 during 2008. A broad spread means that there is a high risk premium in the purchase of CERs compared to EUAs. At the same time, it means that there are large arbitrage opportunities to use CERs for compliance within the EU ETS, since they are a lot cheaper than EUAs. A narrow CEREUA spread could also mean lower demand for CERs, which may discourage project developers from investing in cleaner energy facilities. This analysis brings us to investigate the respective risk factors of CERs and EUAs.

RISK FACTORS First, we examine the idiosyncratic risk factors for each emissions market.

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Idiosyncratic Risks 1. Risk factors specific to CDM credits CDM projects add value to an investment through CER revenues. CDM projects are registered by the CDM Executive Board, and displayed in the CDM pipeline4 along the several steps from registration to validation. One particularly striking source of uncertainty concerning the validation of CDM projects lies in the so-called “additionality” of GHG emissions reductions claimed; that is, project developers need to demonstrate the GHG emissions reductions claimed would not have been achieved in the absence of the project. According to the World Bank (2008), the CDM projects’ distribution is skewed toward a small group of developing host countries: five countries (China, India, Brazil, Mexico, South Korea) concentrate around 80% of the total project pipeline. These


countries have been able to streamline their CDM project identification and approval procedures at an early stage. Moreover, these countries offered several large-scale project opportunities which are generally attractive as they enable investors to spread project transaction costs across a larger number of CERs. Most projects are in the category of renewable energy and biomass energy production: 26% of CDM projects involve hydropower technology, 15% biomass-based energy production, and 14% wind energy. China concentrates 66% of hydropower projects, and India 68% of biomass energy projects. Together, those countries host 90% of wind energy projects. With such a geographic concentration, CER prices are sensitive to a large inflow of validated credits (e.g. from China or India).5 As for CDM distribution by countries, Wang and Firestone (2010) reveal two strands of literature. On the one hand, critics argue that such distribution is unbalanced. This interpretation gathers a majority of views. On the other hand, such “unbalanced” distribution may be due to the different GHG inventory and other factors. The risk factors specific to primary and secondary CERs are as follows. On the primary market, there needs to be (i) an increased predictability of issuance and frequency of transfer CERs by the CDM EB, (ii) an ITL operational and linked to the EU registry system, and (iii) the development of a robust options market. On the secondary market, we need to account for (i) the acceptance into EU registries of CDM credits, (ii) the development of new emissions trading schemes which increase sCER demand and thus push CER prices to converge with other carbon prices under compliance schemes, and (iii) limitations on the use of CERs compliance under the EU ETS. Finally, both pCERs and sCERs are affected by the uncertainties concerning the post-2012 climate regime. 2. Risk factors specific the European carbon market

There are three main sources of risk in the EU ETS. First, the free permits distributed to existing firms on a “first-come, first-served” basis represent a market value of €40 billion that was created at the same time as CO2 emissions were capped. This allocation methodology is also known as grandfathering. Since January 1, 2005 carbon allowances form another asset in commodities against which industrials and brokers need to hedge. As the volume of transaction on the EU ETS has increased steadily from 262 million tons in 2005 to 1,443 million tons in 2007, this trading activity reflects market participants’ progressive learning of this new financial market. Second, during Phase I of the EU ETS (2005–2007), EUAs experienced a high level of volatility around each compliance event. Industrial installations have the obligation to surrender to the EC the exact number of allowances that matches their verified emissions each year around end of March. The official report by the European Commission is disclosed by mid-May, but installation operators have already a fair amount of information between the publication of their own report and the compilation of verified emissions by the European Commission to approximate the total level of emissions relative to allowances allocated and to adjust their anticipations6. Third, installations do not need to physically hold allowances during the year to produce, but only to match the required number of allowances with verified emissions for their yearly compliance report to the European Commission. Consequently, the probability of a potential illiquidity trap exists if market participants face a market squeeze during the compliance event. Another specificity of emission allowances may be highlighted: compared to stocks which are valid during the entire lifetime of the firm, emission allowances are vintaged for a given compliance year and cannot be used for future compliance periods, unless intertemporal flexibility mechanisms are authorized. During Phase I of the EU ETS, the inter-period transfer of allowances has

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been restricted by all Member States (Alberola and Chevallier, 2009).

ETS, such as Land Use, Land Use Change and Forestry (LULUCF) projects.

Common Risk Factors

2. The import limit of CERs within the EU emissions trading system

Similarly, we may identify several common risk factors between EUAs and CERs. 1. The ITL-CITL connection On October 19, 2008 the European Commission’s “Community Independent Transaction Log” (CITL) connected to the United Nations’ “International Transaction Log” (ITL). The ITLCITL connection involved the EU’s 27 Member States disconnecting their national registries, and re-connecting them to the ITL. Simultaneously, the CITL connected directly to the ITL. These operations allowed the delivery of sellers’ international credits from the Kyoto Protocol (such as CERs) into buyers’ EU national registries. Before that date, issued CERs remained in the UN CDM Registry, waiting for the connection with the EU registry to be completed. During Phase II of the EU ETS (2008-2012), the EU Commission has announced that the use of CERs by industrial installations will be capped at 270 million tons per year. For Phase III (20132020), the limit for existing installations will be 40 million tons per year. Altogether, Phase III CER imports will add up to 300 million tons. Thus, the post-2008 EU ETS CER import limit has been fixed at 1.7 billion tons.7 Therefore, the ITL-CITL connection has filled the risk factor common to CDM project developers and investors. First, it has provided stimulus to CER and EUA trading, as the barriers to transfer allowances between UN and EU registries have been removed. Second, it has offered to EU investors in CDM projects the possibility to monetize their assets, by using CERs towards their own compliance or by exchanging them on the European market as secondary CERs. However, it seems worth noting that some types of CERs credits are restricted from use in the EU

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Since the ITL-CITL connection, Kyoto credits may be imported into the EU ETS, and are valid for compliance up to 13.4% on average. As detailed in Section 2.1, the EUA-CER price arbitrage becomes possible up to that limit. Investors will maximize their profits by buying the maximum volume of CERs allowed for compliance and selling the same amount EUAs when the EUA-CER spread is at its maximum, i.e. in the range of €6 to €9. Mansanet-Bataller et al. (2011) provide a detailed analysis of the determinants of EUA and CER prices. Besides, they study the determinants of the EUA-CER spread with regard to market microstructure mechanisms (such as the volume of allowances exchanged, etc). Concerning the role played by the CER import limit for compliance within the EU trading system, we may proceed with the following counter-factual exercise. Eighty million tons of CERs have been used for compliance to cover verified emissions in 2008 (according to the EU Commission).8 At the same time, 250 million tons of CERs have been issued (according to the CDM Pipeline). If we assume the CER issuance rate to be constant,9 the Mission Climat of Caisse des Dépôts has been computing from UNEP Risoe CDM Pipeline the path for the stock of CERs available for compliance within the EU ETS over time, as depicted in Figure 2. Figure 2 shows the path of CERs available for compliance in the EU ETS at time t during Phase II (2008-2012). The solid orange lines denote the stock of CERs available corrected for various issuance uncertainties, while the solid green lines indicate the total gross supply of CER issued. We observe on this graph that, due to technical and institutional constraints, firms could not use more than 1.6 Gt of CERs by April 2013 (Trotignon


Figure 2. CER Stock available for EU ETS Compliance. Source: Mission Climat of Caisse des Dépôts, from UNEP Risoe CDM Pipeline

and Leguet (2009)). Besides, the yearly CER import limit does not seem to be binding before the 2010 compliance event.10 The path of CER delivery displayed in Figure 2 critically depends on the criteria for CDM project validation. In terms of expected CER delivery, HFC, PFC, CH4, and N2O emission-reduction projects have a relatively large market share, which is mainly due to these gases’ high global warming potential. It is also important to look at the distribution of projects and technologies in terms of expected GHG emission reductions. Twenty-two projects involving HFC emissions reductions constitute 17% of expected emissions reductions by 2012.11 Sixty-five projects involving N2O emissions reductions constitute 9% of expected CERs12 (World Bank, 2008). By contrast, the 1,098 hydro projects will deliver just 17% of expected CERs. The distribution of issued CERs issued by technology is important to keep in mind, since HFC- projects (and other gases for which CERs are heavily issued) may not allowed for import in the EU ETS towards Phase III. In terms of risk-assessment, it is also interesting to note that the delivery of credits, and thus

the performance of projects, greatly varies: only 10 to 15% of methane reduction credits could be verified and therefore issued (World Bank, 2008). This ratio is 75% for HFC 23 emissions reduction projects, while N2O projects sometimes deliver more CERs than expected. Besides, the high percentage deliveries of HFC and N2O may be also attributable to the low-hanging fruit and poor quality of verification of additionality (see Narain and Veld (2008)). 3. Uncertainties concerning Post-Kyoto agreements Of course, the list of common risk factors between the CDM and EU ETS markets would not be complete without a careful outlook of negotiations for a post-Kyoto treaty. The European Commission needs to devise its future strategy concerning the status of the CDM and the use of CERs during Phase III of the scheme (20132020). For instance, on technological grounds, CERs generated through HFC destruction or large hydro projects may be banned from import within the EU ETS.

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FUTURE RESEARCH DIRECTIONS In brief, future research in this field includes the careful monitoring of the UNEP Risoe CDM Pipeline, which allows tracking the delivery of CDM credits on international emissions trading schemes overtime. As the CDM develops, and secondary credits get exchanged worldwide, it is very likely that it will become the single “currency” against which the carbon price is fixed.

CONCLUSION This chapter critically examines the role played by Clean Development Mechanism projects for compliance into the EU Emissions Trading Scheme. We have highlighted risk factors specific to each emissions market – additionality and predictability for CERs, grandfathering, compliance events and banking provisions for EUAs – as well as common risk factors – the ITL-CITL connection, the role played by the 1.7Gton import limit, and uncertainties concerning future international agreements on climate change. Our conclusion gears towards a prudent approach concerning the use of CERs for compliance within the EU trading system. On the one hand, CERs foster investments in non-polluting technologies in non-Annex B countries. These project thereby contribute to the “global public good” of fighting climate change by cutting greenhouse gas emissions with a maximum potential (as for HFC destruction or large hydro projects) at lowest cost, and should be encouraged from both economic and environmental viewpoints. On the other hand, the unlimited use of CERs for compliance within the EU ETS would set a price floor for EUAs, and drive down their price. This solution does not appear compatible with the necessary “price signal” of emitting one ton of CO2 in the atmosphere in Europe, which should be high enough to provide incentives for industries to cut back emissions compared to their business-as-usual scenario.

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The bottom line is that the restricted use of CERs for compliance within the EU ETS appears a wise choice from the EU Commission’s viewpoint, in order 1) to limit design inefficiencies that have already affected the price path of EUAs during Phase I (2005-2007) and 2) to foster investments at the EU level in less CO2-intensive production processes.

ACKNOWLEDGMENT I wish to thank the Editor, Zongwei Luo, as well as reviewers for support and useful comments that led to an improved version of the chapter.

REFERENCES Alberola, E., & Chevallier, J. (2009). European carbon prices and banking restrictions: Evidence from phase I (2005-2007). The Energy Journal (Cambridge, Mass.), 30(3), 51–80. Alberola, E., Chevallier, J., & Chèze, B. (2008). Price drivers and structural breaks in European carbon prices 2005-07. Energy Policy, 36(2), 787–797. doi:10.1016/j.enpol.2007.10.029 IPCC. (2007). [fourth assessment report. United Nations Intergovernmental Panel on Climate Change, Bonn.]. Climatic Change, 2007. Lecocq, F., & Ambrosi, P. (2007). The clean development mechanism: History, status, and prospects. Review of Environmental Economics and Policy, 1(1), 134–151. doi:10.1093/reep/rem004 Mansanet-Bataller, M., Chevallier, J., HervéMignucci, M., & Alberola, E. (2011). EUA and sCER Phase II Price Drivers: Unveiling the reasons for the existence of the EUA-sCER spread. Energy Policy, 39(3), 1056–1069. doi:10.1016/j. enpol.2010.10.047


Narain, U., & Veld, K. V. (2008). The clean development mechanism’s low-hanging fruit problem: When might it arise, and how might it be solved? Environmental and Resource Economics, 40(3), 445–465. doi:10.1007/s10640-007-9164-x Trotignon, R., & Leguet, B. (2009). How many CERs by 2013? (Mission Climat Working Paper #2009-05). Wang, H., & Firestone, J. (2010). The analysis of country-to-country CDM permit trading using the gravity model in international trade. Energy for Sustainable Development, 14(1), 6–13. doi:10.1016/j.esd.2009.12.003

CER: Certified Emissions Reduction, valid under the Kyoto Protocol Clean Development Mechanism, which has been validated by the CDM Executive Board of the United Nations Framework Convention on Climate Change.

ENDNOTES 1

2

3

4

World Bank. (2008). State and trends of the carbon market 2008. Washington, DC: World Bank Institute.

ADDITIONAL READING Ellerman, A. D., Convery, F. J., & De Perthuis, C. (2010). Pricing Carbon: The European Union Emissions Trading Scheme. Cambridge University Press.

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KEY TERMS AND DEFINITIONS EUA: European Union Allowance exchanged under the European Union Emissions Trading Scheme, which is equal to one tonne of CO2equivalent emitted in the atmosphere. EU ETS: European Union Emissions Trading Scheme, which is a cap-and-trade program for greenhouse gases emissions developed in the EU 27. CDM: Clean Development Mechanism, valid under the Kyoto Protocol, which allows to cut emissions in developing countries and to import validated credits within other emissions trading schemes.

6

7

8

The author is Member of the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP) and the Laboratoire d’Economie de Dauphine (LEDa). He is also Visiting Researcher with EconomiXCNRS and the Grantham Institute for Climate Change at Imperial College London. Address: Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France. Email: [email protected] See http://ec.europa.eu/environment/climat/ emission/linking_en.htm Note that CERs traded on exchanges are precisely guaranteed secondary CERs (sCERs), but for simplicity we use the common denomination term of CERs throughout the chapter. See http:\\www.cdmpipeline.org To conserve space, we do not comment here on the concept of “programmatic” CDM, which has been developed for small-scale projects. The data in Figure 1 reveals a sharp break in EUA price series during the 2005 compliance event. By the end of April 2006, this price correction of 54% within four days followed the announcement by the EC that CO2 emissions were approximately 3% lower than the allocated allowances during the 2005 compliance period (Alberola et al., 2008). See http://ec.europa.eu/environment/climat/ emission/ets_post2012_en.htm See http://ec.europa.eu/environment/climat/ emission/citl_en.htm

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9

10

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Note this assumption is not overly restrictive. As detailed in Section 2.3, this rate is even likely to be decreasing. As is characteristic of the functioning of the EU ETS, there is a one-year delay in the accounting of verified emissions. Thus, the 2010 compliance event will occur in May 2011.

11

12

Indeed, the HFC global warming potential is 11,700 times higher than CO2, and thus each ton of HFC abated delivers 11,700 CERs. The N2O global warming potential is 310 times higher than CO2.

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Chapter 13

Carbon as an Emerging Tool for Risk Management Tenke A. Zoltáni Islan Asset Management, Switzerland

ABSTRACT Since 2005, when the European Union Emissions Trading Scheme (EU ETS) launched, green adoption in business and industry has been marred by fraudulent carbon credits, VAT swindlers and carbon cowboys, inefficiencies of a nascent market, and not least of all by legislative uncertainty. The disrepute afforded by these examples hindered low carbon growth and deterred emerging business models from adopting more carbon friendly practices. But, as this chapter argues, the shift toward liberal environmentalism has yielded a new generation of businesses seeking to incorporate carbon assets, emissions trading, and sustainability strategies across the value chain. Central to this shift is the notion of carbon as a tool for risk management in businesses, which occurred through the instrumentalisation of CO2 into a tradable asset. By utilising carbon as a financial instrument, businesses are able to manage project risk, market risk, and reputational risk more effectively. This chapter demonstrates this argument through industry examples and provides practical advice for businesses today.

INTRODUCTION Since 2005, when the European Union Emissions Trading Scheme (EU ETS) launched, green adoption in business and industry has been marred by fraudulent carbon credits, VAT swindlers and DOI: 10.4018/978-1-60960-531-5.ch013

carbon cowboys, inefficiencies of a nascent market, and not least by legislative uncertainty. The disrepute afforded by these examples hindered low carbon growth and deterred emerging business models from adopting more carbon friendly practices. But, as this chapter argues, the shift toward liberal environmentalism has yielded a new generation of businesses seeking to incorporate


Carbon as an Emerging Tool for Risk Management

carbon assets, emissions trading and sustainability strategies across the value chain. Central to this shift is the notion of carbon as a tool for risk management in businesses, which occurred through the instrumentalisation of CO2 into a tradable asset. By utilising carbon as a financial instrument, businesses are able to manage project risk, market risk and reputational risk more effectively. This chapter demonstrates this argument through industry examples and provides practical advice for businesses today. The instrumentalisation of carbon began in 1997, when the Kyoto Protocol recognized CO2 as not merely hot air, but rather an internationally acknowledged financing tool for combating climate change. This led to the commoditisation of carbon as both an asset class and an instrument, tradable on commodity exchanges and transactable over-the-counter. As a result, today carbon plays host not just to the fundamental markets of the EU ETS, Clean Development Mechanism (CDM) and voluntary initiatives, but also to a breadth of financial products—derivatives, indices, global exchanges, risk-based pricing instruments, insurance options—which have created entire new businesses. The ability to monetise CO2 is unlocking new revenue streams in emerging business models, and moulding corporate structures to include green financing. For those companies with project management as their core business, carbon finance risk management tools can shed light on effective techniques for managing counterparty, geographical, implementation, regulatory and financing risks. For companies with one foot already in the green sector, new carbon revenue streams and financing options provide direct access or exposure to emissions reducing projects, expanding the company’s global scope. The chapter explains how to break down the risks of an emissions reducing project, but more importantly, how to apply this method of risk measurement to broader company objectives. Companies exposed to the financial markets have a means of portfolio diversification by draw-

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ing on carbon’s unique position as an uncorrelated alternative asset. Energy trading companies and large industrials are already taking advantage of the hedging capability of carbon to cover exposure to oil, coal, metals, European power, natural gas, and more recently biofuels. With growing trading volumes, carbon can be similarly used to hedge currency (fx) and legislative risk by taking a position in the market and investing accordingly. Indeed, since 2005 noted peaks and troughs in the prices of underlying carbon assets (EUAs, CERs, VERs) occurred as policymakers vacillated on energy legislation, environmentally friendly heads of state were (or were not) elected and economic policy outcomes influenced industrial output, dictating the amount of CO2 in the atmosphere. Managing market risk through exposure to carbon is particularly salient for industrials regulated under the EU ETS or those anticipating regulation in the US or Australasia. As in the case of early-acting utilities (such as UK power company Drax), pre-empting legislation and engaging in carbon trading during the first phase of the EU ETS helped minimise the cost of regulatory requirements later. Reputationally, carbon is both an asset and a liability as young businesses are discovering. HSBC’s success in creating a carbon neutral company and raising awareness with its clientele contrasts starkly with the early days of ExxonMobil’s unsympathetic approach to climate change. The 180-degree turn of many large industrials’ (Holcim, Rhodia, BP) approach to carbon has benefited them visibly from a corporate social responsibility (CSR) and a public relations perspective, positively mitigating any reputational hazard. Complementing this, companies such as the Carbon Neutral Company or—most recently— Piqqo are emerging to offtake corporate social responsibility and regulatory risk, at the same time educating clients on emissions reduction. This has come most noticeably in the form of carbon offsetting and carbon footprint product labelling. Through synergies between large CO2 emitting


companies’ financial goals and their clients’ expectations, carbon offsetting can be utilised not only to reduce negative reputational risk, but also to pioneer sustainability in business practices. For example, physical trading companies subjected to sustainability standards by their counterparties are learning what carbon and resource intensity means, and how to minimise these in order to remain attractive. Using carbon as an instrument for risk management has meant learning to adapt to greener business practices. The chapter begins with the economic theory behind climate change oriented policies and decisions, and explains how the discourse around climate change has become embedded in society. Then, after briefly showing the development of carbon into a financial instrument and discussing the risk management tools it has created, the chapter addresses how companies can manage project, market and reputational risk using carbon. Carbon-related investments are also discussed. The chapter then builds on the examples and recommendations of the previous sections to describe the case study of HSBC, a global banking leader which has been notably successful in building a sustainability practice into its business model on the back of its exposure to and experiences with the emissions markets. The chapter concludes by reiterating key points and discussing emerging trends in green finance and sustainability, with a focus on carbon related opportunities. Finally, upcoming market developments are mentioned, to reinforce carbon as an emerging asset class with its own unique risk and investment profile.

BACKGROUND Addressing Negative Externalities and Environmental Risks Ronald Coase propelled the emissions market through his 1960 article ‘The Problem of Social Cost’ which resulted in the Coase theorem. Coase’s

thesis was solving the problem of externalities, defined broadly as a cost or benefit not transmitted through prices and incurred by a party who did not agree to the action causing the cost or benefit. His conclusion was that in the absence of transaction costs, bargaining would lead to an efficient allocation of goods regardless of the initial allocation in a system. Applied to emissions—carbon dioxide, methane, sulphur dioxide and nitrogen oxide among others—viewed arguably as the most significant negative externality of the 21st century resulting in a cost rather than a benefit to the third party unwittingly exposed to air pollution, Coase’s theorem can be identified as a driving force in the emergence of the emissions trading market. According to Coase’s theorem, regardless of the initial allocation of CO2 (measured by total output and today significantly more for OECD countries than less developed parts of Asia and the African continent due to differences in timing and intensity of industrialisation), trading emission rights will ultimately yield an economically efficient allocation of CO2. The most polluting parties—nations and emitting installations—will either receive or be legally mandated to purchase an economically equitable proportion of emission rights vis-à-vis less emitting entities. Coase’s theory is demonstrated to work in practice. Though as is the case with all nascent markets, some still need convincing that the carbon markets are truly working, the pioneer environmental market in the US is evidence that Coase’s theory in practice is effective, overcoming obstacles to efficient allocation. The sulphur dioxide (SOx) and nitrogen oxide (NOx) markets developed in the US in the late 1980s to address the problem of acid rain, but not without considerable transaction costs and obstacles to efficient allocation to say nothing of the industrial hand-wringing and teeth-grinding that took place prior to its acceptance. Indeed, as the market developed, these obstacles diminished, and succeeded in solving a major social liability

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and environmental risk. Acid rain was an enormous problem throughout the US but centred in the Northeast and eastern Midwest, home to the largest number of cities, densest population, and greatest concentration of power and industrial plants. Acid rain caused damage to property, but more importantly to human health, through inhalation and absorption of acidic particulates into people’s lungs and bloodstreams. Entrepreneurs supported by the US government sought to address this with a market solution. By providing a fixed cap on allowed SOx and NOx emissions and the subsequent establishment of an auction and exchange for SOx and NOx emission permits, a financial incentive for firms to find the most cost-effective solution to reducing pollutants was created. In the early years of the market—as is seen in the early days of the emissions market of 2005— the price for one ton of SO2 fluctuated from lows of $65 to highs of $1550. Fifteen years later, the US SO2 market is considered a huge success: it demonstrated Coase’s theorem that negative externalities can be overcome by policy-initiated but market-driven measures. Importantly, this success became institutionalised. Institutionalisation led to acceptance at a corporate and government level, fuelling public support and encouraging private sector innovation for financial products and structures within the SOx and NOx markets. In the two decades from the launch of the market, the 18 million tonnes of SO2 in the atmosphere were reduced to 9 million tonnes, the cost of compliance was less than a tenth of what was expected, and the US achieved $100 billion of annual reduced medical expenses associated with lung disease. The success is evident today. Acid rain is extremely limited. On the market, the cost of eliminating SOx and NOx emissions averages $150-200/ton, while the environmental damage produced by one ton of these emissions assessed by the EPA is nearly $4000. It is upon this market that the carbon markets have also been built. Capitalising on the experience with SOx and NOx in solving an environmental

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externality, meeting the risk demands of the government, corporates and concerned individuals, one can recognise the importance of recognising the pollutants as assets in their own right. Instrumentalising these assets into financial returns drives innovation and investment, contributing to innovative risk management structures.

Commerce-Led Conceptions and Embedded Discourse Commerce-led solutions to solving negative externalities are reinforced in society by businesses and financial institutions as the primary market makers. Indeed, risk management has become a substrategy of neoliberalism, a concept coined in John Williamson’s Washington Consensus of 1989 and today taken to understand the private sector, often market driven, approach to commanding social and economic policy. Neoliberalism maximises the role of business in determining the political and economic priorities of the state. Hence after the issue of CO2 came to the fore at the onset of the Kyoto Protocol in 1997, neoliberal thought and the successes of the SOx and NOx markets proffered solutions. Using the Smithean efficiency of the free market, governments decreed business-friendly regulatory restrictions, and provided the impetus for the conception of the EU ETS. Encouraging competition among firms, promising early leniency for companies in the nascence of the market and placing the risks of climate change squarely on the social agenda hastened the green agenda. The impetus for carbon offsetting began, again evidenced several years later by the enormity of the green fiscal stimulus packages after the financial crisis. By summer 2009, governments around the world committed over $512bn of the global economic stimulus to green projects, with 22% to be spent in 2009. Renewable energy and biofuels, emissions reduction targets and market mechanisms to achieve these goals are now part of nearly all OECD countries’ development plans, with green


initiatives including transport, infrastructure and power use improvements, green job creation, economy-wide energy improvements, and building modernisation (energy efficiency). Carbon risk management opportunities abound. One question remained. How did the key driver of the carbon markets argued thus far, an ideological free market-driven hegemony pushing discourse toward market solutions rather than taxing come about? This view of the market’s efficiency as a solution to climate change rather than a tax on carbon intensive goods has become embedded in the OECD approach. For this, it is important to note the notion of hegemony and embeddedness, as it influences why carbon as a tool for risk management is today accepted. The ‘ideological free market-driven hegemony’ mentioned above is understood in the neo-Gramscian sense of achieving both control and consent for control by defining the discourse, embedding it in society, and influencing the state through civil society (Andree, 2007). What this means, according to the interpretation of Italian philosopher economist Antonio Gramsci’s concept of hegemony, is that civil society—the realm of non-profits and NGOs that intercede between the individual and the state—is where individuals form political identities. Civil society in this interpretation is the primary sphere of influence for government or businesses. Understood in the context of climate change, the influence of studies like the Stern Review in 2006-2007 were monumental in constructing the governmental and private sector approach to its solutions. One should also view the Intergovernmental Panel on Climate Change (IPCC) reports as a critical milestone in the development of climate change, crucial in establishing scientific consensus and leading to the embedded discourse understood today. As substantiated ideas (i.e. IPCC) are constructed in civil society, norms begin to form, and as it effuses discourse becomes embedded in how society deals with a subject. An ‘historical

bloc’ emerges, according to Gramsci, when civil society forms alliances with other classes, political parties, branches of government, etc., converging on a strategic and coherent set of ideas (Andree, 2007). Through this historical bloc—which in the case of climate change includes the attendees of the international legislation debating COPs in Bali and Copenhagen—hegemony is achieved. The success of the hegemony is visible through carefully formulated economic forces, institutions, and ideologies reflected in civil society. In the struggle for hegemony, ‘wars of position’ are undertaken by actors to gain influence in and above civil society. These wars of position are subtly identified by media campaigns, use of language, and depiction of issues: consider the polar bear-laden advertisements. However, successful hegemony is attained only through consent—built upon the acceptance of discourse in society: the shift from ‘must we act?’ to ‘how must we act?’ One additional theory underpins the argument of the shift toward environmentally aware business models that identify and source carbon as a tool for risk management. As in the discussion of hegemony, cognitive-ideational forces affect civil society mentalities to produce a sense of collective subjectivity. The degree of institutionalisation of climate change depends on a number of things, most importantly the cohesion of civil society behind the discourse which succeeds in either embedding it or not, and the ability of the norm resulting from the ideas to define state interests (Bernstein, 2000). In today’s neoliberal landscape, the successful institutionalization of the concept culminates in the shift of environmental and liberal economic concepts toward ‘liberal environmentalism.’The prevalence of this discourse, contributes to climate-change fighting policymaking in the OECD and is gradually embedding itself in developing countries (CDM host countries). Liberal environmentalism—according to Bernstein— “predicates environmental protection on the promotion and maintenance of a liberal economic order” (Bernstein, 2001). This shift is clear when

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viewed in the context of the carbon markets, characterised by liberal interdependence between developed and developing countries, management of the global environment by industrialised powers through complementary benefits, economically efficient advocated solutions to meeting the global challenge of limited greenhouse gases agreed on a multilateral platform. Found in the arguments of both the public and private sector for acting on climate change, environmental protection is nonetheless predicated on the promotion and maintenance of a liberal economic order. After the link between carbon dioxide and anthropogenic global warming was established, and industrial emissions were identified as an externality, the need for risk mitigation arose. The process of carbon’s commoditisation into a tool for risk management can be traced from ideology (neoliberalism, neo-Gramscianism, Coasean economics), to inception (first emissions market in the US), to regulation (Kyoto) to action (establishment of carbon markets). The new generation of businesses seeking to incorporate carbon footprinting, emissions trading and greener strategies across the value chain is best understood in the concept of the shift toward liberal environmentalism. By understanding how this shift came about, through the discussion of discourse and hegemony and norm formation, one can grasp more concretely the congealing ideology of climate change prompted action in business models today. Carbon as a tool for risk management in businesses is important to understanding this shift as without having the necessary instruments in place, business and civil society would never agree to the burgeoning costs of climate change mitigation imposed both physically by the increased frequency of dangerous weather and imposed legislatively by government decisions to act. Through the instrumentalisation of CO2 into a tradable asset and utilising carbon as a financial instrument, businesses are able to manage project risk, market risk and reputational risk more effectively. The industry examples and

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practical considerations for businesses today show how carbon is used as a tool for risk management, underpinned by the long road to economic acceptance outlined by the theories described.

Current Perceptions Broadly, low carbon growth—that is, in a lessgreenhouse gas emitting trajectory—has been accepted as the most sustainable means of economic development. The risks associated with climate change on a meteorological level and the physical and financial impacts that are felt geographically (i.e. impacts on agriculture) and societally (i.e. forced displacement) are disputed and indeed contentious, but here the Stern Review findings are assumed. According to the Stern Review, failure to act now by investing 1%-2% of global GDP per annum in mitigation risks up to 20% drop in global GDP per annum by the start of the next century. Stern cites climate change as the greatest market failure that has ever existed and recommends early action as the key to preventing future disaster (Stern, 2006). This view, widely publicised in the last several years, has reached if not acceptance, then acknowledgement by economists and governments. Its is in tandem with this report that the carbon markets such as the EU ETS and the CDM took off as the economically efficient means of addressing dangerous climate change. But this view also became entrenched in the shift toward liberal environmentalism that has been taking place, and today catalyses the usage of carbon as a tool for managing risks, slowly embedding itself in corporates. In the time leading up to the COP-15 in Copenhagen, from October to December, 154 new climate related policies emerged, bringing the global total to 500+ policies in 125 jurisdictions (countries, states, provinces) (Fulton, 2010 DB). The proliferation of this approach, the need to manage the risks inherent in climate change has become a global phenomenon. These policies encompass the spectrum of green issues, includ-


ing improvements in energy usage and efficiency, research, development and implementation of cleaner technologies and infrastructure, green job creation, environmental education outreach, feed in tariffs and subsidies for sustainability initiatives, to name but a few. Using carbon as tool—rather than limiting it to a liability—has subsequently been embraced by much of the OECD and is gaining traction elsewhere as a means of meeting these policy objectives. Carbon is managing the risks of unsuccessful implementation, creating the very incentives society needs to measure their contribution or environmental malfeasance through individual building blocks. Carbon has thus become a unit of measurement. On a microeconomic level quantifiable tonnes of carbon represent how much an individual’s previously unquantified daily activities cost. One’s trip to work, one’s home heating or cooling, one’s grocery purchases, one’s travels all result in identifiable emissions countable in tonnes of carbon dioxide. Policies designed to minimise emissions utilise carbon as a tool individuals can identify and count and thus help shape behaviour. The collective carbon conscience flowing reciprocally from individuals to firms and governments, among the civil, public and private sectors is reinforced at national and supranational levels. Carbon is being applied as a risk management tool increasingly. The real life examples below demonstrate the opportunities and obstacles that have emerged, and how carbon is being used to manage or exploit these situations.

DEVELOPMENT OF CARBON INTO A TOOL FOR RISK MANAGEMENT What the Carbon Markets Look like Today The Kyoto Protocol, the international agreement setting targets for industrialised countries to cut their greenhouse gas emissions, was agreed in 1997 and came into effect in 2005. It committed

industrialised members to cut their collective emissions to 5% below 1990 levels by 2012, with each member state having its own target based on its historical emissions. Many developing (industrialising) countries have also signed the Protocol, but rather than committing to specific targets, they must report their annual emissions and develop national climate change mitigation programmes. Their role is also instrumental in the Clean Development Mechanism (CDM), one of the two key methods to achieving the emissions reduction targets. The CDM is a mechanism whereby developed countries with emissions targets under Kyoto can invest in emissions reducing projects in developing countries (without emissions targets) and receive the Certified Emissions Reduction credits (CERs) as one tonne of avoided greenhouse gas emissions. The CDM was designed to be the most cost effective method of reducing emissions and thus allows industrialised countries to invest in emissions reductions wherever it is cheapest. At the same time the CDM promotes sustainable clean development by providing less emitting technologies to developing countries and encouraging greener energy production rather than historically dirty production along developed countries’ industrialisation pathways. The economic justification is that for exactly this reason of undergoing industrialisation and not yet being locked into heavily emitting energy production (as in the coal intensity of the UK and US in the 1800s for example), emission cuts are less expensive in developing countries than developed countries. The other key method of reducing emissions is through emissions trading that primarily takes place today in the EU Emissions Trading Scheme (EU ETS), trading in inherently more expensive credits called European Union Allowances (EUAs) than CERs. The largest of its kind in terms of membership and volume, the EU ETS currently covers more than 10,000 installations that are collectively responsible for close to half of the EU’s emissions of CO2 and 40% of its total greenhouse gas emissions. According to the European

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Commission, the EU emissions trading scheme (ETS) is based on a recognition that creating a price for carbon through the establishment of a liquid market for emission reductions offers the most cost-effective way for EU Member States to meet their Kyoto obligations and move towards the low-carbon economy of the future. It works through the distribution of permits to pollute for each EU member state, who distributed these permits to their big industrial emitters who either reduce their emissions at source, buy CERs from offset projects in the CDM, or buy EUAs from less emitting installations within the EU ETS. Those installations that have excess EUAs can sell them into the EU ETS. After each phase (the first one lasted from 2005-2008, the second now ongoing between 2008-2012, and the third is legislated from 2012-2020) the cap is tightened meaning less free EUAs are given out at the beginning and greater reductions must be made to reach the target. The market is EU-wide but taps emission reduction opportunities in the rest of the world through the use of the CDM and allows for links with compatible schemes in other countries. As of May 2010, over 5,100 projects have been submitted to the CDM, excluding those that have been terminated, rejected or withdrawn. About 900 million CERs are expected to come from these projects by the end of 2012, with 407 million CERs having been already issued from 709 projects. About 1,500 projects remain registered that have not yet claimed CER issuance. Sudan joined the pipeline for the first time, submitting two projects in April. These figures speak for themselves as to the success and development of the carbon markets. It attests to the shift described above of carbon as a tool for risk management in businesses, possible through the instrumentalisation of CO2 into a tradable asset. In Sudan’s case, it shows the importance of taking part in an internationally recognised market, thus far a wholly effective training ground for new technologies, and green financing. By taking part in the CDM, businesses are able to manage project risk, market

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risk and reputational risk more effectively. The skillset gained from managing these projects are invaluably applicable across other sectors.

Emissions Reducing Projects Risk Assessed As an example, detailed below is a risk management approach to examining a CDM project, developed to understand how successful the project will be in issuing the number of CERs it states in its original Project Design Document. No geography or methodology was chosen in particular, as the point is to be able to apply this across the entire project pipeline. The takeaway is the risk management approach—the breakdown of the project into several broad categories with additional risk metrics for each category. The approach is common for assessing CDM projects though exact risk factors vary from company to company. However, one will quickly see that this deliberative method can be extracted and applied to a host of other sectors and initiatives—whether examining new business strategies, mandates, projects, joint ventures, and capital outlays.

I. Examining the Project Concept The first step is examining what the project is intending to do—does the concept make sense objectively? The steps involved in the project implementation should be independently examined, and whether it follows logically that the end result (here, the CERs) will be realised. This step includes an examination of the project design, including methodology and technology. It should not be overly complex and for greatest effectiveness, should be based on understood and accepted methods and technologies. The project design should be able to be described in simply to someone previously unfamiliar with the concept. The CDM features over 300 methodologies so rather than reinventing the wheel it is economical from a time and money perspective to use what


already exists. Using the resources available for carbon market participants, it is easy to take a look at how many projects exist using that methodology, and whether or not the projects were successful in passing the CDM process and issuing CERs. Placing the technology and methodology in the concept of the host country is also important— how have they fared with similar projects in the past? Will technology provision or acquisition be a problem? In the past often overlooked within the project concept is the alignment between the project and the goal of CER generation. This entails an examination of the incentive structure and the complexity of the project’s operability. When the alignment between CER production and underlying project purpose is strong, the project will be the most successful. If the project is overly complex to operate and the emissions reducing (CER generating) component is inappropriately linked to the underlying project, it will be unsuccessful. For example, in wastewater treatment projects (whether from the food industry, agricultural or industrial effluent) the alignment tends to be weaker as wastewater treatment is a nonessential part of process—i.e. producing palm oil, paper, etc. If the CERs are only arising from treatment of the wastewater and failure to treat the wastewater has no effect on the end result of the plant’s output, the risk that the wastewater will not be appropriately handled is high. Appropriate incentives and monitoring needs to be in place to mitigate this risk, and sharing the carbon finance benefits is one way of doing so, for example by structuring the CDM project’s CER offtake so that the wastewater operators reap part of the financial benefits. This is particularly the case if the project’s complexity requires additional skills training, i.e. in the wastewater example this is likely the case if it was not part of the traditional industrial process.

II. Examining the Counterparties The next step is the KYC—know your counterparty—the due diligence familiar to banks needed to identify who the business partner is and what their financial history looks like. In CDM transactions, and in any other engagement, the due diligence should go beyond bank statements. Company history, experience, shareholders and structure, market share, geography, and financials are all important, but how the counterparty fits into the long-term strategy of the project is critical. Using the wastewater example again, the growth projection of the industrial product must be examined to understand the likelihood of the wastewater’s continued availability through the first lifecycle of the project, which is 7-10 years of CERs being issued. Then, the wider market view of competitors in the space who may be competing for resources is considered. The local markets fall under this risk metric as it factors into the strategy of the counterparty and competitors. Supply and demand, length of contracts, seasonal shifts, and resource availability are included in the analysis. The financial analysis for the counterparty is traditional—company financial performance, EBITDA, loan history, and then examining the project financials for IRR and NPV with and without CER revenue. These should be considered in light of the counterparty’s motivations in developing the project—how do environmental benefits and plant improvements fit into the big picture. How resistant is the CDM project to market and plant fluctuations? Within the scheme of counterparties is also the host country, Designated National Authority (DNA), and Designated Operational Entity (DOE). A host country assessment includes the political, economic and social aspects in situ and how these aspects react to foreign enterprises. In China for example, CDM projects must be 51% Chinese owned. Access to the CDM project pipeline, available to anyone, provides a quick assessment of how the host country fares vis-à-vis

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the CDM. The greater the experience of the host country with sheer project number, methodologies, CER issuances and rejections give the investor a good feel for doing business in the country. Political also stability comes into play—though the possibility exists, is doing business in Sudan a feasible opportunity, or is Ghana a better option? Will Venezuela seize project assets during civil unrest? CDM projects also require the services of a DNA and a DOEs to drive the project through the CDM cycle. The main responsibility of the DNA is to assess potential CDM projects to determine whether they will assist the host country in achieving its sustainable development goals and to issue formal host country approval where this is the case. In most cases DNAs also provide support to project developers and play a part in promoting the host country as an attractive location for potential CDM investors. Difficulties arise if the DNA is inefficient, slow, and inexpert when dealing with certain project types or generally inexperienced. This can create a backlog of projects and severely impact the timeline of the project. Lastly, CDM projects also require the services of Designated Operational Entities to drive the project through the CDM cycle. The DOEs are private sector companies responsible for validating and subsequently requesting registration of a proposed CDM project activity, then coordinating with the project developer making corrections where necessary. DOEs verify emission reductions of a registered CDM project activity, then certify as appropriate and request the issuance of the CERs. In the last two years several large DOEs have been suspended for failing to properly assess the CDM projects under their care, validating those that should not have been. DOEs have come under increased scrutiny for the quality of the work, and therefore must be carefully considered before hiring them and paying the often exorbitant fees they charge. A shift to smaller DOEs rather than the global leaders such as DNV, Tuev Sued and SGS is being undertaken to avoid this problem exactly,

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and hire those with experience in the geographies and methodologies the CDM project is in.

III. Examining the Logistics Next, the logistics of the project, the means to implementation need to be risk assessed and managed. In many CDM projects, construction has to occur, which brings with it a host of issues in and of itself. Quantities and volumes of the project must be in line with CER forecasts. In the wastewater example this means the amount of wastewater produced and the capacity of the plant must be aligned with each other and CER expectations. Variability in temperatures and seasonal shifts may again impact the project implementation and should be taken into account for construction. Project operations and management should be overseen by someone familiar with the CDM project as well as the underlying plant. Is the equipment foreign produced or local? Can the local operators make any repairs or solve technical problems that arise? It is likely that from construction through project implementation additional training will be needed for existing staff. In terms of the project monitoring, there are expectations of data collecting and storing, and systems monitoring and implementation that ideally should be done by local staff, especially if manual measurements are needed. Quality controls should be enacted as well. As part of the logistics the validation of the project through the DOE must be arranged. CER predictions and issuance is subject to the vagaries of the project, hence the risks must be accurately assessed by the developer and the DOE to avoid delays in receiving CERs. Monitoring reports are to be produced by the DOE and signed off by the project owner.

IV. Examining the Project Performance One of the lynchpins of CDM success is the accurate benchmarking of projects by geography


and methodology to assess the CERs produced. As the energy supply and demand of each region is different, so are the benchmarks of the emissions produced along a business-as-usual trajectory, meaning the amount of greenhouse gases that are produced in the absence of emissions reducing technologies implemented in the region. Comparing business-as-usual emissions with emissions savings based on the implemented projects gives the number of CERs expected and the indicator of financial performance with the cashflow analysis. The other important benchmark is a comparison across similar projects in the region and in the CDM project pipeline to see what kind of project performance can be expected, measured by the expected versus actual issuance of CERs. The carbon industry has developed good benchmarks for comparison across methodologies—for a wastewater treatment project performance ranges from 75-85% of CERs issued versus expected on average taking across methodologies and geographies. Elements of uncertainty govern however— variances in the amount of wastewater produced, changes in temperature, plant breakdowns and uncontrolled shifts in the market affecting demand for the end product will all impact CER output and need to be monitored.

ment in a way that will not pollute unnecessarily. Are the project participant’s concerned with their environmental record and community impact? How do local stakeholders feel about the project? These types of questions must be considered to be labelled a high sustainability project. If, on the other hand, the project has been unfavourably viewed, whether for producing nothing but cash for the project owners or producing negative externalities such as excessive noise or taking jobs away from locals, the project’s success is less likely. In sum, these risk aspects across the CDM project development pathway clearly show that carbon as a carrot or stick can be used to assess a variety of criteria applicable beyond the project. The skillsets learned to manage a project from start to finish are the same that can be used in most other sectors by most business models as a part of day to day activities in dealing with new deals, counterparties, and unfamiliar undertakings. The next section looks at national and sectoral examples of carbon as risk management tool, beyond an individual project.

V. Examining Externalities

In China, similar to other rapidly developing countries, carbon as an instrument for risk management is exceptionally relevant. In early June the NDRC announced that northern, eastern and southern parts of China would experience power shortages and even blackouts during the summer. The NDRC urged local governments not to impose curbs on the transport of coal, which generates more than 70% of the country’s power. Oddly, in a statement on its website according to Thomson Reuters, China’s economic planning agency said “the likely shortages were a reflection of the strength of the economy and the government’s drive to reduce emissions and pollution” (Chiang, 2010). To mitigate this risk the CDM has been successful in implementing alternative energy sources

Another key to success of the CDM as a market mechanism globally accepted is its advocacy of positive externalities of the project. This often comes in the form of employment opportunities and new training but overall identifies sustainable development aspects. For various additional accreditations that the project may want to apply for i.e. the Gold Standard representing high sustainability criteria, additional co-benefits are necessary. The ideal project will improve the area in which it is built—cleaning up bad odours, hazardous waste, and unattractive landscapes in biogas, wastewater and landfill projects—or take action without legislation to improve the environ-

National and Regional Enterprise Examples

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for China—pushing hydropower as a cleaner and nationally accepted means of electricity. While hydropower is increasingly prevalent in China, it is not immune to power shortages either, as the drought in southwestern China demonstrated in late winter. The revenues from carbon investments come in again as a risk allayer—not only are significant returns possible from biogas, biomass, and methane recovery projects, but these diversify the sources of electricity the Chinese can use to meet their burgeoning energy needs and minimise the possibility of blackouts or grid overloads. As the second largest contributor to CDM in projects quantity, India is ridden with its own unique problems, not least of which is energy demand. Carbon has been a very successful tool in managing this risk. One development in the project structures has been the rise to eminence of Programmes of Activity (PoA) described as: • • • •

A voluntary action, Implementing a policy, measure or stated goal, Coordinated by a public or private entity, Resulting in emission reductions or removals that are additional (CDM Rulebook, 2010).

In layman’s terms PoAs allow a number of smaller initiatives to be bundled into one overarching project across jurisdictions and methodologies that achieve a specific goal. In India, PoAs have been instrumental in generating sustainable, efficient electricity through solar cookers, bespoke cookstoves, and most visibly compact fluorescent lightbulb distribution. The Indian National Rail Authority, which is one of the world’s single largest employers, also owns a considerable number of energy consuming assets including the railway stations, trains, and employee accommodations across India. The Indian government was successful in registering an emissions reducing project to replace old inefficient incandescent lightbulbs across the Rail Authority’s energy consuming as-

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sets with CFLs, and distributing CFLs as well to employees to replace them in their own homes, yielding an unprecedented quantity of CERs for a PoA. After registering the project, the Indian government is in the process of auctioning the rights to develop the individual projects broken down by methodology and jurisdiction, to Western entities interested in the CERs. India brilliantly structured this initiative and in doing so mitigated a number of risks through carbon—energy shortages, clean power production, finding appropriate counterparties in future development initiatives, logistics planning, operations, awareness raising for in this case climate change, and project financing. Western investors including global industry leaders such as AES, EDF, Osram and Philips have applied to help implement thus far 44 separate projects under the PoA (Kouchakji, 2010). Crucially, with the risk management tools and skillsets realised through this endeavour, the Indian counterparties can translate this across a spectrum of future business dealings and development programmes on both a national macro and enterprise driven micro level. In light of China’s energy needs and risks, it comes as no surprise then that the Hong Kong Stock Exchange integrated carbon into its strategy in 2008, planning the launch of tradable carbon assets as part of its product offering. Or indeed, that the municipality of Beijing and other metropolitan centres initiated domestic carbon exchanges. As part of its domestic risk management to mitigate unreasonable economic costs likely from rising emissions (particularly in China, with among the world’s highest rates of smog density) and resulting rising healthcare bill, carbon is again utilised as a financial instrument. The world’s stock exchanges are in a race to meet the demands of carbon intense economies and speculators anticipating a gradually clarified and ever-tightening emission reducing treaty—albeit individual mandates at the national or interregional level. Stock exchanges provide trusted, transparent means of managing exposure across the financial markets from currency to


agricultural yield to counterparty risk, why not manage climate change risk through the financial markets as well? Even better, why not manage these risks through carbon? Carbon is an effective foreign exchange hedge (carbon is transacted in Euros) particularly against the dollar (which oil is transacted in and used as a hedge for, but less so as pressure to shift from the dollar is seen in the OPEC states) as well as the British pound. Clean dark and clean spark spreads have been created by traders and trading risk managers to use carbon in showing gains and losses for utilities. Power spreads represent the theoretical profit achievable when using either coal (clean dark spread) or gas (clean spark spread) and buying the appropriate number of allowances or offsets to cover the emissions from each fuel. The spreads are measured in EUR/MWh. A third measure--the climate spread represents the overall favourability of coal over gas (or gas over coal if a negative number). Clean dark and clean spark spreads show the profitability of one fuel over the other given the inclusion of the cost of emissions they produce, also taking into account the greater efficiency of gas over coal. This in turn gives utilities the knowledge of when to switch fuels from burning coal to burning natural gas instead, crucial when fuel prices or emissions credits’ prices rise sharply. Such risk measures are very important to utilities and power generators who, as in Germany, often sell their power forward several years and thus need to hedge their carbon emissions in years in advance. Using carbon as not just a liability but a risk management tool, utilities can take bets on power supply and demand years in advance, and hedge it with corresponding purchases or sales of EUAs and CERs with a variety of counterparties who may be opting for the opposite position. Carbon as a counterparty hedge is not unreasonable to manage. On the one hand, it is easy to see who is managing their emissions on the exchanges, and as the example of the Hungarian emissions trading debacle showed—where used Hungarian CERs were unwittingly sold onto an

illegitimate counterparty who intended to reuse the CERs, thus ‘recycling’ them—carbon creates a new opportunity for knowing your counterparty, to assess who is taking the space seriously, and what implication their own carbon exposure will have on their trading partners. Exchange traded carbon credits avoid these problems and shed light on trading partners. Exchanges are also expanding the global commerce infrastructure in many ways thanks to the growing carbon markets. Not only are exchanges reaching regions far flung from the epicentres of global banking, but they are also taking the infrastructure with them. Companies like APX (now APX-ENDEX following a merger in 2009) who provide both infrastructure and trading solutions have created platforms for tracking emissions reduction credits through the project cycle in Southeast Asia, Latin America and Africa. By working in tandem with the Gold Standard to provide a project registry, APX succeeded in expanding its own product offering while managing projects for developing and developed country clients. The registry removes the risk of tracking credits among counterparties and geographies, and creates a product applicable elsewhere, while new enterprises can emulate the successes of APX in geographies with sparse coverage. Looking again at the OECD, the leading energy exchange Intercontinental Exchange (ICE) in May 2010 made a cash offer for well above market price of the world’s leading climate exchange, aptly named Climate Exchange Plc—operating the European Climate Exchange and the Chicago Climate Exchange. “We believe that a combination with ICE makes strategic sense and look forward to addressing continued opportunities together,” said Climate Exchange chairman Richard Sandor (Kouchakji, 2010). This acquisition again expanding significantly the geographical and product reach of ICE. It builds upon the successes of the European Climate Exchange, which since its inception has exponentially grown its product offerings from plain vanilla spots and futures

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to derivatives covering all tradable emissions assets. ICE can absorb the expertise of ECX, using carbon instruments in its own portfolio and combining existing strategies to take advantage of the natural energy hedge carbon provides. Such consolidation moves will not be uncommon as the fragmented market of exchanges and emissions service providers are slowly absorbed by either competitors or banks seeking to risk manage and gain a foothold in the market.

Solutions and Recommendations What can be inferred from the preceding sections is the host of opportunities that abound for using carbon to assess and manage risk, to identify new opportunities and to manage existing ones, but what remains to be seen are the recommendations for companies interested in applying carbon to their business models. For this, the case study of HSBC is used, pointing out the opportunities to integrate carbon into businesses, which HSBC has successfully done in a non-traditional way. When most businesses think of integrating green finance into their existing models, carbon trading is the most frequently cited example that comes to mind. Other than outsourcing it to a third party, building an emissions trading/procurement desk for a bank, utility or large corporate is often the easiest way to for executives to point to environmentally progressive measures being taken internally. Indeed, trading provides another revenue stream and can be seen as proof that the company is concerned with climate change. HSBC however has built an entire sustainability practice, a freestanding representative division of a world-renowned global banking business.

Corporate Structure HSBC’s corporate structure integrates corporate sustainability teams that work at the Group, regional and national levels to assess the bank’s strategy towards new business opportunities

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and risks, environmental operations and social footprint, and community investment (HSBC, 2010). Below the CEO sit the Heads of Corporate Sustainability in each of the Group’s main regions, who report to the local Chairman and to the Group Head of Corporate Sustainability. The Chairman of Personal and Commercial Banking and Insurance is responsible for Corporate Sustainability on behalf of the Group Chief Executive and the HSBC Holdings Board. In addition to these functions, Lord Nicholas Stern, author of the seminal 2006 Stern Review on the Economics of Climate Change was appointed Special Adviser to HSBC’s Group Chairman on Economic Development and Climate Change. Overseeing this is the Corporate Sustainability Committee, a sub-committee of the HSBC Holdings Board. This sub-Board advises the HSBC Holdings Board and executive management on sustainability policies, including environmental issues. Below these executives are a cadre of individuals having undergone training for implementing HSBC’s sustainability practices in credit risk, purchasing, IT and relationship management (HSBC, 2010). Understandably, this type of intricately interwoven corporate structure is unmanageable and financially untenable for smaller organisations but shows the breadth and depth available for full disclosure and transparency among a bank operating in over 80 countries and providing financial services to more than one hundred million customers. It requires even its most senior executives to have the knowledge of sustainability and the flexibility to be an environmentally aware business.

Corporate Strategy At the strategic level, this is implemented in one part by the guidance of Lord Stern, who is a globally recognised expert in the space of climate change, adaptation and sustainability. Below this, HSBC established separate practices and adopted sustainability guidelines to structure their invest-


ments in the space. For example, as according to the HSBC sustainability website: •

•

•

•

•

The HSBC Climate Change Centre of Excellence, established in 2007, investigates the likely economic risks and opportunities of climate change for the financial markets. HSBC adopted the Climate Principles, a voluntary framework for the financial services sector to guide its response to climate change and the move to a lower carbon economy. The HSBC Climate Partnership a five year, US$100 million commitment to work with four leading climate NGOs and engage HSBC employees in understanding and taking action on carbon emissions. Building on our commitment to being a carbon neutral bank, HSBC sets targets to continue to reduce carbon emissions from energy and business air travel. The risks from climate change are being incorporated into the business systems to protect our buildings, people and operations from natural hazards (HSBC, 2010).

To manage the strategy, HSBC has produced a set of policies to cover investments in areas interesting for sustainable investors on both a risks and opportunities front. This is one set of principles applicable to large and small businesses alike to monitor their lending, ensure sustainability is on the agenda, but protects investors from financial damage. Among these are the Equator Principles, a framework for managing environmental and social risk within project finance understood and regarded by the financial industry. HSBC devises a set of policies to govern sector investments to set out internationally accepted standards to be followed “when we lend or invest in companies or projects operating in certain sensitive sectors” (HSBC, 2010), then standards for reducing emissions internally and within business dealings,

encouragement of microfinance in emerging credit-strapped markets, building water markets, and extending banking possibilities in developing countries such as China, where HSBC is expanding China’s rural bank network. This is not to say that HSBC views sustainability as a charitable practice. Rather, not insignificant returns are expected from these high risk endeavors, but the investment horizon tends to be considerably longer than many banks are interested in. These initiatives serve to both expose and hedge HSBC’s practice to carbon, using the resources available to the bank to manage the risks inherent in investing in emissions reducing projects and sustainability programmes such as those mentioned below. Through its annual Sustainability Report, the bank seeks to draw investors to an environmentally aware business model and display sustainable finance tools, such as the Global Climate Change Benchmark Index, launched in 2007 to track listed companies focused on climate change mitigation.

Strategy in Practice As part of its commitment to climate change mitigation, in 2005 HSBC was the first bank and FTSE100 company to become carbon neutral. A small part of this was educating employees on energy saving measures and implementing them, one project is the upgrading of data storage and computer processing centres for greater energy efficiency, cutting down one large amount of energy needed for cooling. The majority of the carbon neutrality effort came from emissions credit purchases from CDM projects. HSBC does not have a carbon trading desk, it instead relies on its growing skillset in climate and sustainability to source credits and finance projects where it could make a significant impact, and procure the emissions credits if needed to manage its own carbon footprint. Among other initiatives, HSBC is piloting a photovoltaic (solar) panel electricity system

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in Malta, saving emissions by displacing nonrenewable power to the country’s electricity grid. HSBC built on this skillset from solar paneling the London headquarters to eventually become selfsustaining (depending on the London sunshine). New buildings for HSBC are being built sustainably to conserve power and water, cutting the utility costs for the bank. Finally, using its strong presence in the UK, HSBC is financing two wind farms in Scotland as part of its carbon finance strategy, where it then has the option to offtake the emissions reduction credits or the electricity produced while at the same time supporting low carbon growth in the country. In the absence of political pressure, legislation, or overly lucrative financial benefits, companies such as HSBC are acting on sustainability, and voluntarily taking carbon exposure to use it as a tool for learning, developing efficiently, and investing sustainably. As the sustainability practice expands, so will the energy savings that come from more efficient buildings, the returns from microfinance lending, and the revenues from emissions reducing projects. The initiative is a win-win in supporting the company’s reputation and bottom line. Its model is scalable, and indeed a solid example of sustainability in practice.

FUTURE RESEARCH DIRECTIONS Until now, this chapter has taken climate change policy as a given, but seen that companies will pre-empt behaviour changing legislation by enacting internal measures to limit their emissions, encourage corporate social responsibility, and include sustainability in their strategy. These environmentally aware business models are really structured from a bottom-up approach to climate change legislation and represent the most progressive companies. Those looking for an early-mover advantage have reacted similarly, incorporating carbon as a tool for risk management and an opportunity for investment. These types

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of companies encompass the need for future clarity in one distinct direction: that of likely global regulatory outcomes. As in the case of the SOx and NOx markets, government intervention coupled with entrepreneurial approaches to environmental management resulted in the commoditisation of SOx and NOx, which companies could use to manage their risk. Unarguably however, the speed and efficiency at which the market was created and matured would not have happened without the mandate from government regulating the amount of sulphur and nitrogen oxides that companies could emit. This legislation was unwavering and permanent, and indeed solved the problem of acid rain within a decade. Climate change legislation conversely has been ridden with uncertainty, so despite the early actions by some, many other enterprises are stuck in legislative limbo, not knowing whether to adopt costly carbon measures and hedge their future risk to carbon mitigating legislation, or to wait and see if strict new policies would occur in the midterm, affecting their bottom line. This lack of clarity has been truly damaging to the industry as more companies are opting to wait than to act, particularly in the US. Existing markets are in place in the EU, as has been discussed. The EU ETS, legislated through 2020, is a fixture that EU member states are unlikely to dispel. Instead, the current legislative uncertainty on the desk of the European Commission is the choice to move from 20% to 30% reduction targets for the EU by 2020. The Commission’s view is that it thinks carbon prices from 2012-2020 will be too low with a 20% target (given recessionary effects that have already lowered emissions 11% in the EU ETS last year, and the ability to bank carbon credits from 2008-2012 into later periods for compliance), and this will discourage polluting companies from making additional reductions. The lack of emissions abatement in the EU at this 20% target is a major obstacle in the prescribed shift toward a low carbon growth in Europe. By


pushing the target to 30% however, European industries will face a significant increase in their abatement costs—currently €16/tonne for EUAs but expected to rise as could this put EU industry at competitive disadvantage, but it would likely encourage the relocation of plants to countries with less strict emissions controls, a term called carbon leakage. The amount of free allowances given away in 2012 is also an uncertainty for companies at this point—it will depend on whether the 30% target is accepted as well as the emissions levels over the next few years. It is clearly a difficulty for strategic planning and budgeting within the EU, but the member states are fortunate to have at least the certainty of the market through 2020. The certainty of the CDM is also a boon, as it is a source of cheaper credits (CERs trade at roughly a €2 discount to EUAs but can only be used to fulfil a small percentage of emissions abatement), and is likely to be the credit used fungibly throughout global emission trading markets. In this sense, the opacity and irregularity of non-EU emissions markets is certainly an issue needing greater attention. Companies, especially utilities who are most at risk of facing increasing costs from climate change effects and legislation, are finding it a difficult internal battle to pre-empt this unknown risk when their balance sheets are already tight following the financial crisis. Developments in the following markets should focus on clarifying their existing platforms and catalyse private sector spending on low carbon growth: •

Australia, whose Carbon Pollution Reduction Scheme was approved by Parliament, overturned, then reintroduced twice more with slightly different provisions and timelines. Currently PM Rudd has decided to wait until the end of the first Kyoto commitment period in 2012 to enact carbon abatement legislation, but in the mean time a carbon tax is under debate

•

•

•

New Zealand, who has the only fully functioning ETS outside of the EU since 2008 has amended their scheme and loosened targets as they wait for Australia to come on board. Provisions to require the transport, energy and industrial sectors to meet emissions requirements from July 2010 have resulted in a ‘transitional phase’ through January 2013 requiring just a 50% obligation and providing a fixed price of $25/tonne carbon. Agriculture’s inclusion was delayed to 2015. US carbon markets are expected to be the largest source of demand in the world, tripling the size of the EU ETS. However, traction has been poor and climate change bills have been written and discarded over the last several years. The current iteration of the Kerry-Graham-Lieberman bill again changed form as Republican Senator Graham dropped his support due to a clause on oil drilling in the US he wanted included. The BP oil spill in May as well as pending immigration legislation took the focus off of climate change yet again. The US has several functioning regional trading schemes in the Northeast, Midwest and West—led by California—and expects these to be good practice grounds for a federal scheme, now expected no sooner than 2011. President Obama has proposed cuts of 17% from 2005 levels by 2020, taking the US back to its 1990 level of emissions. Japan had a well intended but poorly implemented Voluntary Emissions Trading Scheme launched in 2005 which incentivised participation but did not punish failure to meet intended targets. Japan’s ambitious pledge to cut emissions by 25% from 1990 levels by 2020 has been met with controversy given that it is the world’s fifth biggest polluter and second largest economy. The legislation to make these cuts and impose mandatory cap and trade has passed

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the lower house but debate in the upper house is beginning in summer 2010. Without clarity in these major emitter markets, action on climate change will certainly not happen through a top-down approach. Organisations such as the United Nations Environment Programme leading a Finance Initiative to integrate green finance in the private and public sector, policy approaches such as the Green New Deal launched as a global agreement toward low carbon growth, 2009’s green fiscal stimulus packages, and international landmarks like the COP 15 in Copenhagen certainly influence broader business agendas. They have been leaders of discourse and hegemony formation, but they cannot completely dispel the opacity of government policymaking. These bridges between civil society and the state embed the discourse needed for companies to take bottomup action. By underpinning carbon’s legitimacy and relevancy to quantifiable emissions reduction targets, first movers in the emissions space work with civil society and influence policymaking, paving the way forward for environmentally aware, environmentally progressive businesses models.

CONCLUSION This chapter began by providing the background of environmental markets, explaining how Coase’s theory of externalities was put into practice and solved using market mechanisms in the US SOx and NOx markets. The success of these markets and the rise of neoliberalism, accompanied by the shift to liberal environmentalism lent itself to the approach to climate change mitigation seen today—economically efficient solutions are embraced in the guise of environmental protection, providing a win-win for both the private sector exposed to carbon risk and the civil society most exposed to the dangers inherent in climate change. The chapter then described the instrumentalisation of carbon into a tradable asset and tool for risk

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management, used across markets as a financial instrument, in projects as an underlying asset, a means for counterparty familiarisation, and a mechanism for portfolio diversification in company acquisition or development. The shape of today’s carbon markets were explained and the risk breakdown of a CDM project, to show how carbon project risk analysis can be applied across other applications. Then, the case study of HSBC and its sustainability practice was discussed as a successful environmentally aware business model with voluntary exposure to carbon as an opportunity and risk management tool. Finally, uncertainty over pending carbon abatement legislation was explained as an area in need of research and clarification for the global carbon market to prosper. Carbon is an emerging asset class unlikely to disappear even in the absence of firm government commitments. The total value of the market grew by 6% to $144 billion in 2009 from 2008 despite the financial crisis and many companies putting early action on hold. 8.7 billion tonnes of carbon were traded globally in 2009, another significant increase from the 4.8 billion in 2008 (Kossoy and Ambrosi, 2010). Pending carbon legislation is both a risk and an opportunity, manageable by using the wealth of carbon strategies available to risk managers today. With its own unique risk and investment profile, carbon can be a trading instrument and hedge, a source of project finance and equity investment, and a means of portfolio or business diversification. Companies cash strapped in 2008 monetised carbon allowance given to them for free at the start of the year to raise money when credit was (and still is) in short supply (Kossoy and Ambrosi, 2010). Other companies took advantage of competitors severely affected by the downturn and the market saw a rise in merger and acquisition activity where either entire portfolios of projects or credits were purchased, or in the case of exchanges and emissions service providers, the enterprises were bought and sold. Diversification in the project market meant that less developing countries received financ-


ing and sustainable development opportunities through carbon revenues that would not have been otherwise available. Continued expansion into Africa provides exposure to OECD countries into newly emerging markets and brings opportunities for technology and knowledge transfer without compromising financial returns. Overall, these developments and successes are reducing global emissions. Indeed, world carbon dioxide emissions from energy use fell 1.4% last year, the first time since 1998. In large part this is thanks to the reduced economic activity from the recession, but in small part it can be linked to the global actions being advocated and assumed by governments, companies and civil society. Continuing on this trajectory and utilising the tools available through carbon will ensure environmentally aware business models and sustainable solutions for global economic development.

REFERENCES Andree, P. (2007). Genetically modified diplomacy: The global politics of agricultural biotechnology and the environment. Vancouver, Canada: UBC Press. Bernstein, S. (2000). Ideas, social structure and the compromise of liberal environmentalism. European Journal of International Relations, 6(4), 464–512. doi:10.1177/1354066100006004002 Bernstein, S. (2001). The compromise of liberal environmentalism. New York, NY: Columbia University Press. CDM. (2010). What is a programme of activities? CDM rulebook: Clean development mechanism rules, practice & procedures. Retrieved from https://cdmrulebook.org/452 Chiang, L., & Wheatley, A. (2010, June 10). China to face power shortages this summer. Thomson Reuters.

Coase, R. (1960). The problem of social cost. The Journal of Law & Economics, 1–44. doi:10.1086/466560 Deutsche Bank Climate Change Advisors. (2010). The green economy: The race is on. Global Climate Change Policy Tracker. Retrieved from http:// www.dbcca.com/research HSBC. (2010). Reporting sustainability. Retrieved from http://www.hsbc.com/1/2/ sustainability/2009-reports Kossoy, A., & Ambrosi, P. (2010). States and trends of the carbon market 2010. Washington, DC: Carbon Finance Unit at the World Bank. Kouchakji, K. (Ed.). (May 2010). Climate exchange shares soar on ICE acquisition bid. Carbon Finance. Sikorski, T. (2010, 01 June). Weekly carbon and energy matters - is 30 the new 20? Barclays Capital Commodities Research. Stern, N. (2006). Stern review on the economics of climate change. HM Treasury, London. Retrieved from http://www.hm-treasury.gov.uk/ sternreview_index.htm

KEY TERMS AND DEFINITIONS Kyoto Protocol: The 1997 environmental treaty, ratified in 2005, which agreed a 2012 target for developed country signatories to reduce their emission and created flexible market based mechanisms in including the EU ETS and CDM to help meet the targets. EU ETS: The EU Emissions Trading Scheme which is one of the tools the EU can use to help meet its greenhouse gas emissions reduction target under the Kyoto Protocol of 8% reductions of greenhouse gas emissions from 1990 levels by 2012. It covers over 10,000 installations;

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trades in credits called EUAs (European Union Allowances). CDM: Clean Development Mechanism, one of the Kyoto Protocol flexible mechanisms where industrialised countries invest in projects in developing countries to reduce carbon and generate tradable credits called CERs used for compliance for emissions reduction targets. CER: Certified Emissions Reduction, the credits produced by CDM projects which can be used by industrialised nations to offset carbon emissions at home and meet their Kyoto reduction targets; at a discount to the EUAs traded under the EU ETS. Liberal Environmentalism: Environmental protection on the promotion and maintenance of a liberal economic order; characterised by eco-

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nomic interdependence between developed and developing countries, management of the global environment by industrialised powers through complementary benefits. Externality: Impact on a third party that is not directly involved in the transaction, in which case prices do not reflect the full costs (negative externality) or benefits (positive externality) in production or consumption of a good or service. Hegemony: A concept promoted by the Italian philosopher Antonio Gramsci where a group achieves both control and consent for control by defining the discourse, embedding it in society, and influencing the state through civil society. Corporate Social Responsibility: The management of the implications of corporate decision making on society and environment.

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Chapter 14

Voluntary Emissions Reduction: Are We Making Progress? Robert Bailis Yale University, USA Neda Arabshahi Yale University, USA

ABSTRACT While binding regulations on greenhouse gas (GHG) emissions have yet to be introduced outside of a limited number of high-emitting sectors in the EU, several organizations have set up voluntary GHG programs that promote firm-level inventories and/or emission reductions. Many argue that these programs are not forceful or rigorous enough to result in real emissions reductions and may simply encourage “greenwashing.” In 2007, the United Nations Global Compact initiated the voluntary Caring for Climate (C4C) platform for businesses wishing to demonstrate climate leadership. To assess how voluntary emissions reduction programs have performed, this study examines the progress that C4C signatories have made. The results show widely dispersed GHG quantities and a range of reduction plans. Due to the lack of uniform, comparable data, the authors call for standardized, clearly defined carbon accounting guidelines as the first step towards effective corporate GHG management.

INTRODUCTION Worldwide, 371 companies endorse Caring for Climate (C4C), a business leadership platform started by and operating under the United Nations Global Compact. By pledging support for C4C, these companies have voluntarily pledged to DOI: 10.4018/978-1-60960-531-5.ch014

reduce their greenhouse gas emissions. Business leaders commit to: taking practical actions now to increase the efficiency of energy usage and to reduce the carbon burden of [their] products, services and processes, to set voluntary targets for doing so, and to report publicly on the achievement of those targets annually in [their] Communication on


Voluntary Emissions Reduction

Progress. Building significant capacity within [their] organizations to understand fully the implications of climate change for [their] business and to develop a coherent business strategy for minimizing risks and identifying opportunities. (Caring for Climate, 2007) Early-movers in emissions reduction could benefit from a smoother transition into carbonregulated policy frameworks, significant costsavings, and develop ways to hedge against volatile fossil fuel prices (Hoffman, 2005). However, the strategic decision to transition a company to a low carbon trajectory can often be extremely challenging to implement. In addition, voluntary initiatives with no clear targets may simply induce companies to join and to benefit from being associated with a climate-friendly movement, without actually taking concrete actions towards reducing greenhouse gas emissions (GHGs). This chapter provides a qualitative and quantitative analysis of progress towards emissions reduction for the 255 Large companies (out of 371 Small, Medium and Large companies) that signed C4C. The Small and Medium-sized companies that have signed Caring for Climate are not included in this study. Graduate students at Yale University conducted this research with the aim of understanding whether voluntary GHG disclosure programs such as C4C and the Carbon Disclosure Project (CDP) are effective. The CDP is a nonprofit organization that requests greenhouse gas emissions disclosure data from major corporations throughout the world (Carbon Disclosure Project, 2010). Reporting formats for CDP are far more amenable to systematic collection of data, therefore most of the information in this study is from the C4C signatories that also participate in CDP. Signatories to C4C agree to submit annual “Communications on Progress” that are made available to the public on the UNGC website (Caring for Climate, 2010). Based on a review of these submissions, a wide range of firm-behavior is observed. For example, 16% of C4C signatories

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have disclosed emissions in a comprehensive way, identifying both emission reduction strategies and intensity targets. 28% of firms report achieving reductions in emission intensities, 37% report some form of absolute emission levels. However, 57% of firms have demonstrated little progress, either by submitting reports do not offer insight into the firm’s emissions and plans for abatement, or by failing to submit any information at all. As the environmental community pushes for global and regional regulations on greenhouse gas emissions, the question that is too often missing from the conversation is how successful will companies be at revamping their operations, and what types of guidance do they need, in order to meet potential regulatory obligations. The complex and ever-changing structures of most global corporations make it very challenging to both accurately count current emissions and predict the time, effort and capital expenditure necessary to meet future emissions reduction goals. In addition, until recently, almost all companies lacked access to experts who knew how to properly set targets, update business models and re-engineer manufacturing processes to meet stated emissions reduction targets. Beyond these challenges, many companies that have committed to reducing their emissions have not received clear, uniform guidelines on how best to tackle this challenge. There are a range of programs that ask companies to report on their emissions, however each program has its own unique set of questions and framework for reporting, making it hard for companies to economize by applying lessons or frameworks from one reporting scheme to another. Too often these programs do not explicitly define how companies should draw a system boundary to avoid double counting while ensuring all emissions they are responsible for are being captured (Pew Center, 2004). It is unclear whether companies currently have the capacity to succeed in emissions reduction programs. However, companies desperately want


know when and how they will be required to reduce their emissions. Repeatedly they have stated that in an era of uncertainty with regards to regulation on climate, it is impossible for them to properly plan their energy investments. Companies need to know what type of regulation they should anticipate so they can plan their investments properly. Energy infrastructure is not replaced very frequently and energy upgrades often involve expensive capital investments that do not pay back for many years. In most of the U.S. climate change policy proposals, businesses are given only a 3-5 year ramp up period to prepare for regulation (Pew Center, 2010). In addition, these climate policy proposals do not define precise GHG measurement and reporting methodology. A short ramp up period that lacks proper greenhouse gas accounting guidelines will not provide companies enough time to make the energy investments needed to meet emissions reduction goals. “Unlike market-based approaches to environmental management…voluntary programs have emerged as a pragmatic response to the need for more flexible ways to protect the environment” (Morgenstern & Pizer, 2007, p. 23). It has been almost three years since the launch of C4C, and 10 years since the CDP was launched. During this time 2,500 organizations have measured and disclosed their emissions via CDP (Carbon Disclosure Project, 2010). Voluntary emissions reduction platforms such as C4C and CDP help businesses think about, frame and communicate emissions data. However, it is unclear whether companies that participate in these programs are actually reducing their GHGs in absolute terms. The absence of regulation means that reporting on emissions reduction is not consistent between companies and between reporting years. This study examines disclosures by C4C participants in attempt to answer the question: Do voluntary reporting schemes work to reduce corporate greenhouse gas emissions in absolute terms and could they possibly serve as a substitute for regulation?

BACKGROUND “Despite almost a decade of public and private efforts in voluntary reductions in the United States, emissions of greenhouse gases rose 14.1% from 1990 to 2000, an average annual increase of 1.3% (Gardiner & Jacobson, 2002, p. 32). Scientific consensus calls for dramatic reduction in emissions in order to avoid the worst impacts of climate change (Meinshausen, 2006). Starting in January 2010, the United States Environmental Protection Agency (EPA) has mandated that the 13,000 highest GHG polluters measure and report their emissions (Plumer, 2009). Many companies do not yet have the expertise to count their emissions. However, others have been participating in voluntary disclosure programs and are already measuring and reporting their emissions, albeit with varying degrees of coverage. These companies have spent years learning how to navigate the complex world of carbon foot printing and may have a competitive advantage as the EPA’s new program starts up. They have not only counted their emissions, they may have also determined how much energy they are using, and possibly wasting. This simple action of reviewing energy use has allowed many companies to identify where and how to reduce energy use, and therefore save money (Plumer, 2009).

Voluntary Reduction Programs A wide range of emissions reduction programs have evolved in response to different government climate regulations. These programs tend to fit into three categories described below in Table 1.

Voluntary Disclosure Programs Voluntary reporting programs such as those detailed below are essential in preparing companies for carbon regulation and emissions trading. These programs prompt companies to inventory and manage energy use and GHG emissions to meet

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Table 1. Categories of voluntary emission reduction initiatives (Bäckstrand, 2008), (Price, 2005) TYPE

CHARACTERISTICS

EXAMPLES

Purely Voluntary

• Historically cover a smaller share of industrial sector energy use • Agreement between the climate program and industry • Negotiated targets with commitments and time schedules on the part of all participating parties • Focus on financial gains through energy efficiency • Long-term outlook from a business perspective (e.g. 5-10 years), so energy-efficiency investments can be planned and implemented • Motivated by programs and policies (facility audits, assessments, benchmarking, monitoring, information dissemination, and financial incentives) that assist the participants in understanding and managing their energy use and emissions • Successful programs use low-cost incentive programs for participating entities like government and public recognition, information on energy-efficient technologies, government assistance, and training in energy management • Some provide financial assistance such as free energy audits or tax exemptions for buying energy efficient equipment

• Greenhouse Challenge, Australia • Voluntary Agreements to Limit Carbon Dioxide Emissions, New Zealand • EKO-Energi program, Sweden • Climate Vision, U.S.

Threat of Future Regulation or Tax

• In addition to voluntary program incentives, these programs include easier environmental permitting procedures, promise of relief from additional regulations, and avoided implementation of energy or GHG emissions taxes • Often show higher participation levels than purely voluntary programs

• AERES Negotiated Agreements, France • Agreement on Climate Protection, Germany • Keidanren Voluntary Action Plan on the Environment, Japan

Strict Regulations

• Voluntary programs implemented in conjunction with GHG emissions taxes or strict regulations • Rely on a combination of incentives used in the previously described programs and use of penalties for non-compliance such as increased regulations • Many of the more recently established programs allow the use of emissions trading in order for participants to reach their targets

• Large Final Emitters Program, Canada • Agreements on Industrial Energy Efficiency, Denmark • Climate Change Levy and Agreements, UK

specific reduction targets (Price, 2005). However, all voluntary programs are not made equal. There are a range of voluntary reporting programs that stem from government agencies and NGOs. These programs vary in stringency and rules, thus yielding a range of outcomes. The programs include: • • • • • • • • •

UNGC’s Caring for Climate (C4C) The Carbon Disclosure Project (CDP) The Global Reporting Initiative (GRI) EPA Climate Leaders The U.S. Department of Energy (DOE) The Chicago Climate Exchange (CCX) Greenhouse Gas Protocol (GGP) The Climate Registry (CR) American Carbon Registry (ACR)

Some of these programs offer detailed guidelines on how to calculate and report emissions

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while others simply serve as platforms for emissions disclosure. When assessing the rigor of a voluntary carbon reduction program, such as C4C, it is important to compare it to the other programs that exist. In Table 2, several popular voluntary disclosure programs are compared with regards to size, requirements, mission, and quality of instructions provided.

When Do Voluntary Reduction Programs Meet Their Goals? Voluntary emissions reduction programs are successful when they provide participants with adequate guidance and incentives to meet program goals. Typically, purely voluntary programs have notable drawbacks. Since there are so many of them and many companies belong to more than one voluntary program, double counting of emis-


Table 2. Voluntary Emissions Disclosure Programs Name

Participants

Launch

Requirements

Quality of Instructions

Mission

UNGC’s Caring for Climate (C4C)

371 total (255 Large Companies)

2007

Submit annual Communication on Progress (COP)

Limited

Framework for business leaders to advance practical solutions, help shape public policy and attitudes. Companies set goals, develop and expand strategies and practices, and publicly disclose emissions.

The Carbon Disclosure Project (CDP)

2,500 organizations in 60 countries

2000

Complete online questionnaire (using GHG Protocol as framework)

Most Detailed

Collects and distributes high quality information that motivates investors, corporations and governments to take action to prevent dangerous climate change.

The Global Reporting Initiative (GRI)

1,500 organizations in 60 countries

1997

Reporting framework has flexible disclosure options

Most Detailed: Cornerstone of program is Sustainability Reporting Guidelines

A network-based organization that pioneered the most widely used sustainability reporting framework and is committed to its continuous improvement and application worldwide. This framework sets out the principles and indicators that organizations can use to measure and report their economic, environmental, and social performance.

EPA Climate Leaders

194

2002

Complete GHG inventory using Climate Leaders GHG Inventory Protocol, set GHG Inventory Management Plan, set 5-10 year emissions reduction goal, annually report inventory data and document progress, publicize participation, goals and progress.

Detailed

An EPA industry-U.S. government partnership that works with companies to develop comprehensive climate change strategies. Participating companies commit to reduce their impact on the global environment by completing a corporate-wide inventory of their greenhouse gas emissions based on a quality management system, setting aggressive reduction goals, and annually reporting their progress to EPA.

Chicago Climate Exchange (CCX)

350

2003

Members make a legally binding emission reduction commitment.

Very Detailed

The world’s first and North America’s only greenhouse gas emissions registry, reduction and trading system, with offsets worldwide. Voluntary to join but targets are legally binding.

Greenhouse Gas Protocol Corporate Standard (GHG Protocol)

1000 (plus all the members of other groups such as CDP that use this)

2001

Corporate Standard provides standards and guidance for companies and other organizations preparing a GHG emissions inventory. To complement the standard and guidance provided, cross-sector and sectorspecific calculation tools are available. These tools provide step-by-step guidance and electronic worksheets to help users calculate GHG emissions from specific sources or industries.

Most Detailed

The most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions. The foundation for nearly every GHG standard and program in the world - from the International Standards Organization to The Climate Registry as well as hundreds of GHG inventories prepared by individual companies.


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Table 2. continued Name

Participants

Launch

The Climate Registry

423

2007

American Carbon Registry

unclear

International Standards Organization (ISO) 14064

unclear

Requirements

Quality of Instructions

Mission

Voluntary commitment to measure, verify and publicly report GHG emissions to the Registry.

Very Detailed

A nonprofit collaboration among North American states, provinces, territories and Native Sovereign Nations that sets consistent and transparent standards to calculate, verify and publicly report greenhouse gas emissions into a single registry. The Registry supports both voluntary and mandatory reporting programs and provides comprehensive, accurate data to reduce greenhouse gas emissions.

1997

Option to report GHG inventory, publishes standards, methodologies, protocols and tools GHG accounting, based on International Standards Organization (ISO) 14064 and sound scientific practice. .

Very Detailed

A leading voluntary offset program with strong standards for environmental integrity and over a decade of operational experience in high quality carbon offset issuance, serialization and transparent on-line transaction reporting.

2006

Use the GHG Protocol Corporate Standard

Most Detailed

Specifies principles and requirements at the organization level for quantification and reporting of greenhouse gas (GHG) emissions and removals. Includes requirements for the design, development, management, reporting and verification of an organization’s GHG inventory.

sions and reductions is a risk. With regards to changing future patterns of energy use, voluntary programs do not send strong enough price signals to stimulate demand and production of clean energy technology (Gardiner & Jacobson, 2002). In general, programs that have the lowest incentives have the weakest results. In addition, programs with stronger incentives such as the UK, Danish and Japanese programs show the highest level of emissions reduction. However, the range of emissions reduction between the weakest and strongest programs is small. In a 2007 study it was found that no energy-related programs have more than 10% impact on emissions and most have an impact that is closer to 5%. Despite the generally low impact of voluntary programs, not surprisingly, both high incentive programs and low barrier to entry programs are successful in gaining participants. This increase in participation may lead to larger overall reductions, even if the percentage reduction of any given company is low (Morgenstern and Pizer, 2007).

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Upon close investigation of completely voluntary programs it is clear that participants have trouble meeting their targets or do not have the capacity to properly measure their reductions to assess whether or not they met their targets. For example a voluntary program in Finland reported that it was not able to evaluate results due to insufficient data monitoring (Hansen and Larsen, 1999). In the French Voluntary Agreement on CO2 Reduction, most improvements were found to overlap with the industry’s business-as-usual efficiency improvements (Chidiak, 2002). In general, programs where companies face the threat of regulation have higher emissions reduction outcomes. For example, the Netherlands Long Term Agreements, which are agreements between companies and government authorities, and was implemented as an alternative to regulation, met and passed their goal of 20% energy efficiency improvement between 1989-2000 (De Watcher, 2007). The total efficiency improvement was 22.3% (Gerrits and Oudshoff, 2003).


Overall, programs that lack government pressure, offer few incentives and have no penalties for not meeting targets yield much lower reduction levels than programs with more stringent rules and consequences and higher rewards for meeting targets. For this reason, programs may start out weak and strengthen their structure and incentives/penalties in second or third phases. Studies show that, although success varies greatly between voluntary programs, those that are more structured can have very good results (Price, 2005). Regardless of success in meeting reduction programs, voluntary programs can alter the way that a participating entity thinks about and manages its energy footprint. For example, EPA’s Energy Star program led to GHG reduction of 15.2 million metric tons of carbon equivalent (MMTCE) by program participants (energy-efficient products and buildings) from 1990-2000. However appliance and building sector emissions as a whole increased by 103 MMTCE over this time period (Gardiner & Jacobson, 2002). Moreover, Energy Star has come under recent criticism due to lack of oversight and weak enforcement (Wald, 2009), (Wald, 2010). In addition, the U.S. Climate Challenge program resulted in emissions that were reported to go down, but upon closer inspection it was found that total emissions had increased. Companies had reported reductions, but not their increases (Gardiner & Jacobson, 2002).

Corporate Strategy in Joining Voluntary Programs Despite the range of outcomes related to voluntary programs, and the low emissions reduction rates, it is important to note that companies may benefit from simply participating in the program. Companies may participate with one or more of the following factors in mind: •

Voluntary reduction programs often provide free or low-cost technical assistance

•

•

•

• •

•

•

•

•

to companies attempting to reduce their emissions (Hoffman, 2005). When facing future regulation, being prepared may protect the company and save it money in the long run (Welch and Hibiki, 2003). In the absence of regulation, voluntary programs allow companies to set targets at their own pace and in a way that best fits their strategic objectives (Hoffman, 2005). If most of the direct competitors or peers within an industry are participating, it could be detrimental to be one of the few non-participants (Hoffman, 2005). Participation may give the company a competitive advantage within its industry. Emissions reduction programs tend to outline how a company can reduce energy use, leading to efficiency gains and bottom line financial savings (Gardiner & Jacobson, 2002). Installing or using alternative energy sources can reduce company demand for traditional fossil fuel, thus protecting the company from fluctuations in fuel prices. Participating in these types of programs can be good for a company’s public image (Welch and Hibiki, 2003). An entity could belong to a larger, umbrella group or holding company that requires its members to participate in emissions reduction (Tollefson, 2007). If there is going to be future climate change regulation, participants in pre-cursor, voluntary programs could have the capacity to shape these regulations to their advantage (Rugman and Verbeke, 2001).

Whatever the reason, we do not know when there will be comprehensive climate regulation in the U.S., however “many forward thinking U.S. companies have decided that it is in their best interests to hedge their strategic bets, preparing for either scenario” (Hoffman, 2005). Others realize

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that they industry is such that their emissions will never be regulated and it does not make business sense for them to invest money and human capital into reduction programs (Hoffman, 2005).

Emissions Scopes This study is concerned with GHG emissions that result from all corporate activities. These activities range from fueling trucks that mine for metals to powering lights in an office with electricity. GHG emissions typically occur where some sort of reaction such as combustion or decomposition is occurring. Despite the fact that not all companies have operations that physically encompass these types of reactions, all companies demand the services or products of other companies that burn fuels or engage in other GHG emitting activities. For this reason it is important to define how a company is involved with emissions. Direct GHG Emissions represent a reaction that is occurring at a source controlled by the reporting company. Indirect GHG Emissions represent a reaction that is occurring at a source that is NOT controlled by the reporting company. However, the emissions occur as a result of product or service demands made by the reporting company. These emissions can further be divided into three scopes: Scope 1: All direct GHG emissions. Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam. Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities not covered in Scope 2, outsourced activities, waste disposal, etc. (The Greenhouse Gas Protocol, 2010).

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ANALYSIS OF CARING FOR CLIMATE SIGNATORIES This study set out to examine the impact of the UNGC’s C4C program, and explore the extent to which participating firms reduced emissions or improved emissions intensities. In addition, it explores the types of successes and shortcomings C4C signatories experience throughout this process.

Research Methods1 The project assessed public disclosures of GHG emissions of large company “Caring for Climate” (C4C) signatories within the UN Global Compact (UNGC). The analysis began in September 2008 and included the public disclosures of GHG emissions of 145 large companies that were C4C signatories at that time. The original objective was to identify progress toward disclosure and more generally toward the objectives described in the C4C business leaders’ statement. In January 2010 this data was updated to reflect new disclosures and additional C4C signatories, for a review of 255 companies in total.

Results The firms surveyed originate in 47 countries and represent 28 distinct business sectors. For 62% of the companies, we analyzed Communications of Progress (COPs), which is the reporting system that the UNGC requires of all signatories on an annual basis. Some firms had very detailed COPs with specific GHG emissions numbers and reduction targets. For those COPs that did not include this information, we looked for it on the company websites, in the sustainability reports, and in the annual reports. In addition, 38% of the large company signatories were participants in the Carbon Disclosure Project (CDP). Reporting formats for CDP are far more amenable to systematic collection and


Figure 1. Geographic Regions Represented by C4C Signatories

Figure 2. Major Business Sectors Represented by C4C Signatories

analysis of data, therefore we relied heavily on CDP data for those firms participating in that program. For more information see Figure 1, 2 and Appendix.

Disclosure2 As of January 2010, there were 152 companies that disclosed some information regarding their emissions. Of these, there were 109 companies

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Table 3. Disclosure Trends for C4C Large Company Signatories (1999-2008) Trend

Quantity

Percentage

Total Large Companies

255

100%

Disclosed Nothing

103

40%

Table 4. Quantitative Disclosure Trends for C4C Large Company Signatories (1999-2008) Reported

Quantity

Percentage

Scope 1 Emissions

85

33%

Scope 2 Emissions

81

32%

Disclosed Something

152

60%

Scope 3 Emissions

58

23%

Disclosed Quantitative Data

109

43%

Scope 1, 2, or 3

86

34%

OECD Countries

176

69%

Emissions Intensity

71

28%

CDP Participants

98

38%

that disclosed quantitative data in one or more years within the 1999-2008 reporting years. 103 companies (40%) did not disclose any information. 98 companies were simultaneously C4C signatories and CDP participants. See Table 3 for summary of these results. As mentioned above, only 43% of companies disclosed quantitative information in one or more of the following categories: GHG emissions, emissions reduction goals, emissions intensity. In contrast, 57% (146 companies) filed COPs in the past three years but did not include quantitative disclosure in the categories mentioned, see Table 4. Rather than focus on specific companies that did not report, or on companies that reported but did not provide any quantitative information, the focus of subsequent sections is the 86 companies (34%) that have disclosed scope 1, 2, or 3 emissions numbers. We found that in any given year all 86 of these companies did not disclose their emissions. However, 26.8% of all C4C companies disclosed their 2006 emissions numbers, this represents the highest number of companies disclosing for a given year. See Table 5 for details: From the analysis, it was clear that accounting for firm-level GHG emissions presents a challenge to many companies. As the explanatory note attached to the C4C Business Leaders’ Statement acknowledges, many C4C participants currently, “do not have the capacity to measure their GHG

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GHG Reduction Plan

94

37%

Reported ALL of the Above

42

16%

Reported NONE of the Above

146

57%

emissions due to size and other organizational characteristics” (Caring for Climate, 2010). The firms participating in C4C are responsible for a wide range of GHG pollution. Seven firms report annual emissions exceeding 100 million tons of CO2-e: larger than the annual emissions of Denmark and Sweden combined. 12 firms in the sample emit less than 100 ktCO2. Table 6 summarizes findings related to the 255 C4C signatories analyzed: Well over half of the C4C signatories now collect and publicly disclose some GHG emissions data. Nearly half provide sufficient data to start tracking emissions over time, and this proportion should increase in the coming years. However, the trends that are reported at this stage should be interpreted with care. It is apparent from the public disclosures that many firms are still establishing an accounting methodology. Some of the changes in GHG emissions documented in this report are the result of changes in accounting rather than actual changes in pollution. In addition, large companies frequently merge with others and/or divest holdings, which can have dramatic effects on their net emissions. Figure 3 shows the prevalence with which C4C signatories reported quantitative emissions data. Companies within OECD countries report more frequently than companies in non-OECD.


Table 5. Number of Firms Disclosing Scope 1, 2, or 3 Emissions Data, by Year Year

# of Firms

Percentage

1999

1

0.39%

2000

2

0.78%

2001

2

0.78%

2002

3

1%

2003

6

2.4%

2004

17

7%

2005

26

10%

2006

72

28%

2007

74

29%

2008

5

2%

However, companies that also participate in CDP are much more likely to report quantitative data. As mentioned earlier, 38% of C4C signatories participate in the Carbon Disclosure Project, in addition to their C4C participation. These signatories also account for most of the quantitative disclosure data. See Figure 4 and Figure 5 for more information.

Table 6. Summary Statistics for All C4C Signatories Reported

#

%

At Least 1 Year of Emissions

94

37

Disaggregate Emissions (Scope 1, 2, and/or 3)

93

36

Emission or Energy Intensity

71

28

More than 1 Year of Emissions, which permits a trend analysis

69

14

More than 1 Year of Intensity, which permits a trend analysis

20

14

Climate Change Mitigation Targets

94

37

Emissions Reductions (in any of the years)

20

8

Intensity Improvements (in any of the years)

12

5

Simultaneous Intensity Improvements and Emission Reductions

3

1

No Climate-Related Data

146

57

More of the C4C companies are headquartered in OECD countries (see definitions at end for more information). In addition, more companies that are in OECD countries (rather than NonOECD countries) reported emissions information for at least one year. It is possible that these data

Figure 3. Quantitative Emissions Disclosure Data, CDP versus C4C

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Figure 4. Reporting Difference, C4C Only versus C4C + CDP

Figure 5. Quantitative Emissions Disclosure Data, C4C Only versus C4C + CDP

points are significantly higher in OECD countries because these are places where companies already face, or are more likely to face climate regulation in the near future. See Figure 6. Figure 7 shows annual emissions changes reported by companies between 2000 and 2008. The 86 firms reporting annual emissions provide

252

109 data points. 87% of annual emission changes fall between –10 and +10 thousand tons of CO2; however, increase outnumber decreases in emissions by more than two to one. In other words, between 2000 and 2008, for every firm that reported an annual reduction in emissions, two firms report an increase in emissions.


Figure 6. Reporting Differences, OECD versus Non-OECD

Figure 7. Annual Emissions Changes between 2000 and 2008

Intensity Emissions reductions may be achieved through advances in production and more efficient use of resources. Efficiency with respect to GHG emissions is measured as “intensity” (emissions per unit output or per unit revenue). Intensities can be useful metrics; however, they must also be interpreted with care in order to avoid drawing improper conclusions. In some cases, intensities

alone may not be good indicators of emissions trends. This is particularly true in sectors that lack consensus on intensity metrics. For example, in service-oriented sectors, intensities may be defined as emissions per employee, per unit revenue, or even per unit of office space (Carbon Disclosure Project, 2010). In addition, using emissions intensity allows firms to make carbon reductions in relative terms without necessarily making absolute reductions.

253


For example a company such as Wal-Mart understands that as its business grows its absolute level of emissions will grow. However it can work to reduce the amount of tons CO2e emitted per dollar of revenue without sacrificing company-wide growth. If the reduction in emissions intensity happens at a level that is greater than the increase in company-wide growth levels then absolute emissions reductions can be reached. Despite the desire to use emissions intensity to compare two unlike companies, often companies believe there is a measurement that they should be using for intensity that is unique to

their specific operations or business. Examples of emissions intensity units publically disclosed in 2007 are shown in Table 5. The diversity of emissions intensity units highlights how challenging it is to be able to compare emissions between companies. For example Pepsi indicates that its intensity should be measured in metric tons of CO2-e per liter of beverage manufactured. In comparison, for Cisco emissions per floor area and number of employees using the space makes the most sense. If each company is able to define its own intensity metrics, it will not be possible to compare companies, even if they are in the same

Table 5. 2007 Emissions Intensity, Examples of Intensity Measurements (Carbon Disclosure Project, 2010) Name

Sector

The appropriate measurement of emissions intensity for your company

ABB Ltd.

Technology Hardware & Equipment

Metric tons of CO2e per employee (scope I and scope II)

Areva


GHG emissions per turnover

Bayer AG

Chemicals

Metric ton of CO2e per ton product sold

BT Group plc

Fixed Line Telecommunications

kg C02e per unit of the company’s contribution to GDP

Centrica plc

Oil & Gas Producers

g CO2/kWh of power generated

Cisco Systems

Software & Computer Services

normalized office and lab electricity use and emissions by floor area and head count for internal management

City Developments Limited

Real Estate Investment & Services

Metric tons of CO2e per square meter

Coca-Cola Hellenic

Beverages

metric tons CO2 per liter of beverage produced in terms of emissions from product carbonation, energy use in bottling plants and transportation, as well as any coolant gases lost from refrigeration equipment

Deutsche Telekom AG


Metric tons of CO2-e per gigabyte

Dow Chemical Company

Chemicals

GHG emissions of CO2 equivalents per unit of production

E.ON AG

Gas, Water & Multi-utilities

Metric tons CO2 per megawatt-hour (MWh)

Ikea

General Retailers

Total gram CO2/m3 produced for IKEA

Johnson Controls Inc.

Automobiles & Parts

Metric tons of CO2e per million USD in revenue

Munich Re Group

Financial Services

metric tons of CO2e per employee and year

Newmont Mining Corp

Industrial Metals & Mining

Metric tons of CO2-e per gold ounce equivalent sold

PepsiCo, Inc.

Food Producers

Metric tons of CO2-e per liter

SAS Group

Travel & Leisure

Metric tons of CO2-e per revenue ton kilometer

Seiko Epson


emissions / unit sales (1990 = 100)

SOMPO Japan Insurance Inc.

Financial Services

CO2 metric tons per net premium of 10 billion JPY

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sector. However, this type of measurement might be useful when assessing the energy efficiency of manufacturing a product or delivering a service. Out of the C4C signatories under scrutiny, only a handful actually report that they have committed to carbon intensity reduction goals and even fewer have made progress towards these goals. Table 6 includes the intensity reduction achievements that specific companies included in their disclosure reports. Based on the explanations given in these reports, the companies have dedicated time and energy to defining how best to reduce their emissions intensity and working towards reduction goals.

SOLUTIONS AND RECOMMENDATIONS With GHG regulations entering into force in the US and EU, it is important for companies to have an understanding of trends in emissions and possible means of reducing them. As business-as-usual

pathways become more costly, companies with a firm grasp of emission reduction strategies will be in a stronger position relative to their competitors. As demonstrated in the preceding sections, there is a wide range of quality and coverage in accounting for emissions when strategizing about how to achieve emission reductions. A company could gain a competitive advantage by joining voluntary initiatives that encourage internal improvements and provide a head start on regulations. The company may also gain from an improved image, by being associated with a “green initiative”. However, the benefits of this action only extend beyond the firm and reach society more broadly if the firm takes steps to achieve real improvements in environmental performance. As we have shown, 57% of the large companies that have signed onto the UN Global Compact’s Caring for Climate Program report no climate-related data. 37% of companies report at least one year of emissions data and 69 firms (27%) report more than one year of emissions data. Of the 69 firms reporting more than one data point, only 20 firms

Table 6. Examples of Progress Towards Intensity Reduction Targets in 2007 (Carbon Disclosure Project, 2010) Name

Progress Towards Intensity Reduction Targets

BT Group plc

53% reduction since 1996-7 baseline

Lafarge

16% reduction per ton of cement CO2 emissions on a worldwide basis compared to 1990.

Unión Fenosa

During 2007, specific emissions from thermal power plants in Spain reached 706 g/kWh, which represents a reduction of 29% compared with 1990

E.ON AG

In total, E.ON reduced its carbon intensity in 2007 by 31%, in comparison to figures from 1990, due in part to the technical improvement of our generation portfolio.

Telecom Italia

45% increase as compared to 2006, thus higher than the defined target (873 bit/Joule). The annual increase of the index is however progressively shrinking.

Munich Re Group

In 2007 a decrease in energy consumption was achieved (due to efficiency increase in facility management and in IT). However, increase in travel intensity compensated this achievement (due to increase in business activities in America and Asia).

Unilever

Since 1995 reduction of 30% in GHG emissions per ton production

Centrica plc

reductions in this level of carbon intensity since 2005: 2006- 394g CO2/kWh 2007- 390g CO2/kWh

Pfizer, Inc.

35% reduction in GHG emissions as indexed to $ MM revenue. This goal achievement resulted in an absolute reduction in GHG emissions of nearly 20% from 2000 to 2007.

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(8% of all large company signatories) reported actual decreases in emissions. Similarly, only 12 firms (5% of the total) report improvements in intensity. We have yet to see broad climate benefits generated by the C4C program. Nevertheless, the survey of other voluntary reporting programs and the investigation into C4C data both demonstrate that when a company is provided with clearly defined rules and guidelines on how to define its system boundary, count emissions, and report in a manner that is uniform, the emissions data is more useful for managing and reducing emissions (Smith, Morreale, & Mariani, 2008). This study would not have been able to draw the minimal conclusions it had in the absence of some useful data. When firms have clear guidance, and adhere to it, the data can actually be compared across companies and across reporting years, allowing observers to understand whether or not real emissions reductions are occurring. However, the reporting system that the UNGC has in place via the COPs does not lead to uniform data that can be compared between companies. COPs vary widely from company to company: some have detailed reports on their numbers and targets and progress toward goals, while others are no more than public relations communications. Currently companies do not receive guidelines on exactly what to report, what units to use, how to define their system boundaries, etc. Therefore, companies report using a wide range of frameworks. The results of this data are scattered and disjointed. Due to all of the irregularities in data reporting in both the C4C and CDP, we are not at a point where data from these reporting platforms can be used to compare performance between companies. In order to improve this situation, there is a need for improved restrictions on exactly how companies fill out the online emissions databases. Measures must be taken to make these systems error-proof and uniform if we want to be able to accurately compare companies. It would be more effective

256

and less confusing if the standards were to merge into one set of guidelines, similar to the Generally Accepted Accounting Principles (GAAP) for financial accounting. This would not restrict the number of reporting and reduction programs, it would just standardize the carbon accounting so that there would be opportunity for fair comparison between companies. In addition to this standardized reporting structure, it would be ideal if there were a licensing program such as the Certified Public Accountant (CPA) title that accountants obtain. This would create a network of qualified and certified carbon professionals that all operate the same way to measure emissions. All of this shows us that the field of accounting for and communicating GHG emissions remains an immature field and much work is needed in order to improve data quality and reliability. Traditional business accounting took over 100 years to develop and people still make mistakes on and cheat on their tax forms. However, carbon accounting does not have the luxury of taking 100 years to develop. We need an improvement in this system now. Over the past few years, programs have started to converge and consolidate. For example Wal-Mart has decided to use the CDP to track emissions of their suppliers (Carbon Disclosure Project, 2010). In addition, the World Resources Institute and World Business Council for Sustainable Development have partnered together for 10 years to develop the Greenhouse Gas Protocol (Pankaj & Ranganathan, 2004). In order to improve carbon reporting quality there is a need for this trend to continue. In the absence of uniform rules for measuring emissions and defining system boundaries, fair evaluations of companies based on the numbers they voluntarily report is not possible. Some companies are very clear and explicit in their measurements, but others have measured limited portions of their operations and/or value chain and still more have joined voluntary initiatives, but failed to disclose any data at all. In the same way that Kyoto flexible mechanisms have evolved and


been revised/upgraded constantly, this process will require much more experience and deeper understanding of the processes in order to succeed.

FUTURE RESEARCH DIRECTIONS Voluntary carbon reduction programs are diverse and often complex. Some of the current programs such as CDP have now existed long enough that examining the numbers companies are reporting uncovers useful information about whether or not they work. In addition, there are regulations emerging that will lead to significant changes in emissions reduction platforms moving forward. It would be informative to follow these programs to understand how the existence of programs such as C4C influences corporate ability to meet regulated obligations under future climate regimes. As companies incorporate the new regulations, it will be interesting to examine how companies that have participated in voluntary programs comply with regulation, and compare the results to those of companies that have not participated in such programs.

SEC Ruling In January 2010 the U.S. Securities and Exchange Commission (SEC) ruled that all public companies would be required to disclose in their annual reports how climate change and climate-related impacts influence their business. This decision sends the message that SEC believes climate-related issues could result in material impacts on a company’s success. The SEC feels that investors and analysts should be made aware of how climate change is impacting a business so they can include this information in the risk profile of companies they are reviewing. The mandate will require that corporations report on the physical effects of climate change AND how climate laws could potentially change performance. As per the rules of the SEC, com-

panies have always been required to include information in their annual reports about risks that they face that would influence their stability and revenues, including environmental risks. However, this ruling highlights the fact that the SEC now acknowledges greenhouse gas and climate change management as a relevant part of doing business in today’s global community. Anne Stausboll, chief executive of the California Public Employees Retirement System, summarizes this by telling the NY Times, “investors have a fundamental right to know which companies are well positioned for the future and which are not” (Ceres, 2010). The SEC has provided specific suggestions on the types of climate-related issues to disclose. These include investments in regions where rising sea levels are imminent, climate-related lawsuits, business opportunities such as increasing renewable electricity production, or legislation related to any climate-related matters. The ruling does not specifically require disclosure of GHG emissions. However, companies are required to report how climate laws could potentially change their performance. Now that this ruling has been issued, it would be useful to compare how companies previously disclosed risk to how they will disclose risk in their 2010 annual reports. Moving forward, it would be interesting to investigate the way that analyst reports interpret the disclosure of such risks, and how investors make decisions in relations to these disclosures (Broder, 2010).

EPA Mandatory Reporting of Greenhouse Gases Rule As of January 1, 2010 the 10,000 largest GHG emitters in the US are required to report the quantities of their emissions to the United States Environmental Protection Agency (EPA). This reporting should account for about 85% of U.S. GHG emissions. All fossil fuel suppliers, vehicle and engine manufacturers, and facilities that emit

257


over 25,000 metric tons of CO2-e per year will be submitting annual emission data to the EPA. Under this new regulation all facilities will have to submit their first emissions report to the EPA in March 2011. The data will be submitted via an electronic reporting system that they will launch in January 2011. Similar to the SEC ruling, it will be very useful to examine this program once it has run for several years to determine whether emissions reductions are occurring (United States Environmental Protection Agency, 2010).

Non-English COPs Of the C4C companies, there were a few companies that did not appear to have disclosed significant numbers on climate change, however the reports were not in English so we could not say definitively whether they did indeed disclose. Closer examination and translation of the sustainabilityrelated publications/websites of these companies could provide interesting information on emissions numbers and reduction plans.

CONCLUSION It is an exciting time to investigate the emerging business models for carbon foot printing and reducing greenhouse gas emissions. Although many businesses and international bodies are interested in managing their greenhouse gas emissions, they have considerable learning to do before they will be able to succeed in this task. Without the advice of external consultants, most businesses lack the knowledge and understanding of their own greenhouse gas emissions; therefore they are unable to plan a clear path to emissions reduction. In addition, even a predominant international organization like the UN has not yet been able to create a rigorous carbon reduction program. This may be yet another indication that voluntary emissions reduction programs do not

258

provide the right types of incentives to ensure a low carbon future. We set out to determine whether voluntary emissions reduction schemes such as C4C work. This study concludes that there is no way to determine whether C4C works because the data that is being reported is incomplete. Since companies are unable to measure their emissions accurately, it is unclear whether they are properly managing these emissions. With regards to reducing greenhouse gas emissions it is clear that the details really do matter. The detailed accounting aspects of emissions reduction are what will lead to success or failure in this field. Until there are uniform regulations and detailed guidelines on exactly how each and every entity can report and reduce their emissions, it will be hard to determine whether real emissions reductions are occurring, or whether they are just being shifted to different entities. Despite the issues with voluntary reduction programs, these programs do have an important role in the climate change space. They prepare companies for climate change regulation by teaching them how to count and report their emissions. Companies are able to practice setting targets and attempting to reach these targets. In addition, emissions programs help companies to identify how they could benefit financially from reducing their emissions through energy savings. Overall, the fact that there are so many voluntary reduction programs, and that they have so many members, is exciting. These programs demonstrate the support of the business community for reducing GHG emissions and addressing the challenge of climate change. It will be interesting to see how these voluntary programs evolve, as companies become more carbon savvy and regulation becomes more of a reality.

ACKNOWLEDGMENT The authors would like to thank the United Nations Global Compact and the Yale Center for


Business and the Environment for their financial support of this research. In addition, the following individuals have been instrumental in completing this project: Yale Center for Business and the Environment:Bryan Garcia; Research Assistants:Christopher Aung, Yale School of Forestry & Environmental Studies; John Good, Yale College; Raman Jee Jha, TERI University; Priyanka Juneja, TERI University; Julia Meisel, Yale College; Eva Zlotnicka, Yale School of Management and the Yale School of Forestry & Environmental Studies; United Nations Global Compact: Cecilie Arnesen Hultmann; Lila Karbassi

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KEY TERMS AND DEFINITIONS Carbon/Emissions Disclosure: When an entity makes its greenhouse gas emissions quantities public, it is said to be disclosing its emissions or the amount of carbon it is responsible for generating. Carbon Disclosure Project (CDP): An organization that collects and makes public, data on corporate greenhouse gas emissions levels and energy and greenhouse gas management plans. CDP is independent, non-governmental and notfor-profit. Caring for Climate (C4C) Platform: This voluntary program is part of the United Nations Global Compact. It creates an opportunity for companies to demonstrate their commitment to combating climate change. These companies pledge to take practical actions to increase energy efficiency, reduce greenhouse gas emissions and set voluntary targets towards these goals. The companies also agree to publicly disclose their progress towards these targets annually via the UN Global Compact’s annual Communications of Progress. Direct Emissions: Emissions that result from a reaction that occurs at a source controlled by the reporting company (The Greenhouse Gas Protocol, 2010). Indirect Emissions: Emissions from a reaction that is occurring at a source that is NOT controlled by the reporting company. However, these emissions occur as a result of product or service demands made by the reporting company (The Greenhouse Gas Protocol, 2010). OECD (Organisation for Economic Cooperation and Development) Countries: OECD membership is one measure of the level of development and economic, social and political stability of a country. This organization has 30 member countries that are primarily high-income economies with a high Human Development Index. The organization provides a forum for countries

committed to democracy and a market economy to compare policy experiences, seek and discuss answers to problems, and coordinate international and domestic policies. Scope 1 Emissions: All direct greenhouse gas emissions (The Greenhouse Gas Protocol, 2010). Scope 2 Emissions: Indirect GHG emissions from consumption of purchased electricity, heat or steam (The Greenhouse Gas Protocol, 2010). Scope 3 Emissions: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities not covered in Scope 2, outsourced activities, waste disposal, etc. (The Greenhouse Gas Protocol, 2010). United Nations Global Compact (UNGC): The compact is an initiative to bring together corporations throughout the world and encourage them to integrate sustainable and socially responsible practices into their business model. UNGC has ten principles that it asks business to adopt in the areas of human rights, labor, environment and anti-corruption.

ENDNOTES 1

The data presented in this report are based on publicly available sources: primarily COPs submitted to UNGC and reports from the CDP, for firms participating in that parallel program. Given the multiple data sources utilized and the volume of data scrutinized, it is possible that errors or omissions occurred. We wish to enlist the signatories themselves in this assessment of progress. If errors or omissions are apparent in this overview, please contact the authors with corrections. The analyses will be updated regularly. The data set was most recently updated in January

263


2

264

2010 and covered 255 large firms that were signatories to C4C as of January 2010. There were a few companies with reports that were not in English. The COPs that these companies submitted did not have any

numbers, such as tons of GHGs listed. However, since the reports were not in English we cannot say definitively whether they did indeed disclose.


APPENDIX A Table 7. C4C Signatories, Sector, Country and Reporting Information Name

Sector

Country

C4C/ CDP

Emissions

Scope 1

Scope 2

Scope 3

Reduction Plan

Intensity

ALL

Akzo Nobel nv

Pharmaceuticals & Biotechnology

Netherlands

CDP

X

X

X

X

X

X

X

Allianz SE

Financial Services

Germany

CDP

X

X

X

X

X

X

X

Anglo American plc

General Industrials

UK

CDP

X

X

X

X

X

X

X

Areva


France

CDP

X

X

X

X

X

X

X

AXA

Financial Services

France

CDP

X

X

X

X

X

X

X

Bayer AG

Chemicals

Germany

CDP

X

X

X

X

X

X

X

BT Group plc


UK

CDP

X

X

X

X

X

X

X

Cadbury

Food Producers

UK

CDP

X

X

X

X

X

X

X

Centrica plc

Oil & Gas Producers

UK

CDP

X

X

X

X

X

X

X

Cisco Systems


US

CDP

X

X

X

X

X

X

X

Deutsche Telekom AG


Germany

CDP

X

X

X

X

X

X

X

Diageo Plc

Beverages

UK

CDP

X

X

X

X

X

X

X

E.ON AG


Germany

CDP

X

X

X

X

X

X

X

ENI

Oil & Gas Producers

Italy

CDP

X

X

X

X

X

X

X

GDF Suez


France

CDP

X

X

X

X

X

X

X

Holmen AB

Forestry & Paper

Sweden

CDP

X

X

X

X

X

X

X

Iberdrola S.A.


Spain

CDP

X

X

X

X

X

X

X

Johnson Controls Inc.

Automobiles & Parts

US

CDP

X

X

X

X

X

X

X

Lafarge

Construction & Materials

France

CDP

X

X

X

X

X

X

X

Munich Re Group

Financial Services

Germany

CDP

X

X

X

X

X

X

X

Natura Cosmeticos S/A

Household Goods & Home Construction

Brazil

CDP

X

X

X

X

X

X

X

Nedbank Group

Financial Services

South Africa

CDP

X

X

X

X

X

X

X


265



Sector

Country

C4C/ CDP

Emissions

Scope 1

Scope 2

Scope 3

Reduction Plan

Intensity

ALL

Nokia Corporation


Finland

CDP

X

X

X

X

X

X

X

Novartis International AG


Switzerland

CDP

X

X

X

X

X

X

X

Novozymes


Denmark

CDP

X

X

X

X

X

X

X

Pfizer, Inc.


US

CDP

X

X

X

X

X

X

X

PSA Peugeot Citroen

Automobiles & Parts

France

CDP

X

X

X

X

X

X

X

Reed Elsevier Group plc

Media

UK

CDP

X

X

X

X

X

X

X

Repsol YPF

Oil & Gas Producers

Spain

CDP

X

X

X

X

X

X

X

RICOH Company Ltd

Industrial Engineering

Japan

CDP

X

X

X

X

X

X

X

Rio Tinto plc


UK

CDP

X

X

X

X

X

X

X

RWE AG


Germany

CDP

X

X

X

X

X

X

X

SOMPO Japan Insurance Inc.

Financial Services

Japan

CDP

X

X

X

X

X

X

X

Statoil

Oil & Gas Producers

Norway

CDP

X

X

X

X

X

X

X

Telecom Italia


Italy

CDP

X

X

X

X

X

X

X

The Dow Chemical Company

Chemicals

US

CDP

X

X

X

X

X

X

X

TNT N.V.

Industrial Transportation

Netherlands

CDP

X

X

X

X

X

X

X

Unilever

Beverages

UK

CDP

X

X

X

X

X

X

X

Unión Fenosa


Spain

CDP

X

X

X

X

X

X

X

UPMKymmene Corporation

Forestry & Paper

Finland

CDP

X

X

X

X

X

X

X

Veolia Environnement

General Industrials

France

CDP

X

X

X

X

X

X

X

Westpac Banking Corporation

Financial Services

Australia

CDP

X

X

X

X

X

X

X

ABB Ltd.


Switzerland

CDP

X

X

X

X

X

ABN AMRO Holding N.V.

Financial Services

Netherlands

CDP

X

X

X

X

X

continued on following page 266



Sector

Country

C4C/ CDP

Emissions

Scope 1

Scope 2

Scope 3

Reduction Plan

Intensity

X

X

Alcan Inc.

General Industrials

Canada

CDP

X

X

X

AVIVA plc

Financial Services

UK

CDP

X

X

X

X

X

Cable & Wireless Panama S.A.


Panama

CDP

X

X

X

X

X

Coloplast

Health Care Equipment & Services

Denmark

CDP

X

X

X

X

CPFL Energia SA


Brazil

CDP

X

X

X

X

X

X

Danisco

Beverages

Denmark

CDP

X

X

X

X

X

Dow Chemical Company

Chemicals

US

CDP

X

X

X

X

X

Endesa, S.A.


Spain

CDP

X

X

X

X

X

France Telecom


France

CDP

X

X

X

X

X

Infosys Technologies Ltd


India

CDP

X

X

X

X

X

L’OREAL

Personal Goods

France

CDP

X

X

X

X

X

Newmont Mining Corp


US

CDP

X

X

X

X

X

Nippon Yusen Kabushiki Kaisha (NYK Line)


Japan

CDP

X

X

X

X

X

Novo Nordisk AS


Denmark

CDP

X

X

X

X

X

OMV Aktiengesellschaft

Oil & Gas Producers

Austria

CDP

X

X

X

X

Sasol Ltd.

Chemicals

South Africa

CDP

X

X

X

X

X

The Coca-Cola Company

Beverages

US

CDP

X

X

X

X

X

Vattenfall AB


Sweden

CDP

X

X

X

Coca-Cola Hellenic

Beverages

Greece

C4C

X

X

X

X

X

Fuji Xerox


Japan

C4C

X

X

X

X

X

Seiko Epson


Japan

C4C

X

X

X

X

X

Alcatel-Lucent


France

CDP

X

X

X

X

X

X

X

ALL




Sector

Country

C4C/ CDP

Emissions

Scope 1

Scope 2

Scope 3

Reduction Plan

Autostrade per Italia S.p.A.


Italy

CDP

X

X

X

X

AvivaSA Emeklilik ve Hayat

Financial Services

Turkey

CDP

X

X

X

X

BBVA, S.A.

Financial Services

Spain

CDP

X

X

X

X

Capgemini

Support Services

France

CDP

X

X

X

X

City Developments Limited


Singapore

CDP

X

X

X

X

Gas Natural SDG, S.A.

Oil & Gas Producers

Spain

CDP

X

X

X

X

Japan Airlines Corporation

Travel & Leisure

Japan

CDP

X

X

PepsiCo, Inc.

Food Producers

US

CDP

X

X

Saint-Gobain


France

CDP

X

X

X X

Intensity

X

X X

X

SAS Group

Travel & Leisure

Sweden

CDP

X

X

X

X

Thales

Aerospace & Defense

France

CDP

X

X

X

X

The Linde Group

General Industrials

Germany

CDP

X

X

X

X

Ikea

General Retailers

Sweden

C4C

X

X

X

X

REN - Redes Energeticas Nacionais, SGPS, SA


Portugal

C4C

X

X

X

Storebrand ASA

Financial Services

Norway

C4C

X

ArcelorMittal


Luxembourg

CDP

X

X

Landsbanki Islands

Financial Services

Iceland

CDP

X

X

LVMH

Personal Goods

France

CDP

X

X

X

Metso Corporation


Finland

CDP

X

X

X

Scottish & Newcastle plc

Beverages

UK

CDP

X

X

X

Yara International ASA

Chemicals

Norway

CDP

X

X

X

Asia Pacific Resources International Holdings Limited

Forestry & Paper

Singapore

C4C

X

X

X

Grupo Cementos Portland Valderrivas


Spain

C4C

X

X

X

X

ALL

X

X

X

X X


268



Sector

Country

C4C/ CDP

Korea National Housing Corporation


Korea, Republic of

C4C

Deutsche Post DHL


Germany

CDP

Essilor International


France

CDP

Tata Steel


India

CDP

Telefónica S.A.


Spain

CDP

Hilti


Liechtenstein

C4C

Sekem Group

Food Producers

Egypt

C4C

Brasil Telecom S.A


Brazil

CDP

X

EADS NV

Aerospace & Defense

Netherlands

CDP

X

Skanska AB


Sweden

CDP

X

Banyan Tree Hotels & Resorts Pte Ltd

Travel & Leisure

Singapore

C4C

X

DONG Energy


Denmark

C4C

X

Dupont

Chemicals

US

C4C

X

Empresa Nacional del Petróleo

Oil & Gas Producers

Chile

C4C

X

Energoinvest


BosniaHerzegovina

C4C

X

Korea SouthEast Power Co. (KOSEP)


Korea, Republic of

C4C

X

LEGO A/S

Leisure Goods

Denmark

C4C

Titan Cement Company


Greece

C4C

United Company RUSAL


Russian Federation

C4C

V & S Group

Beverages

Sweden

C4C

Emissions

Scope 1

Scope 2

X

X

X

X

Reduction Plan

Intensity

X

X

X

X

X

X

ALL

X

X

X

Scope 3

X

X

X X X X

269


APPENDIX B Table 8. C4C Companies That Did Not Disclose, Sector and Country Information Name

Sector

Country

C4C/CDP

Abengoa

General Industrials

Spain

CDP, not public

Carlsberg Group

Beverages

Denmark

CDP, not public

CEMEX


Mexico

CDP, not public

Gamesa Corporación Tecnológica


Spain

CDP, not public

SAP AG


Germany

CDP, not public

Shiseido Co., Ltd


Japan

CDP, not public

Banco Do Brasil

Financial Services

Brazil

CDP

Hiscox Ltd

Financial Services

UK

CDP

Mitsui Chemicals, Inc.

Chemicals

Japan

CDP

Oil and Natural Gas Corporation

Oil & Gas Producers

India

CDP

A.P. Moller - Maersk


Denmark

C4C

AarhusKarlshamn AB

Beverages

Denmark

C4C

AB Electrolux


Sweden

C4C

AG2R LA MONDIALE

Support Services

France

C4C

Agbar


Spain

C4C

Air India

Travel & Leisure

India

C4C

AIRBUS SAS

Travel & Leisure

France

C4C

Aitken Spence & Company Ltd

Travel & Leisure

Sri Lanka

C4C

Aksa Akrilik Kimya Sanayi A.S.

Chemicals

Turkey

C4C

Aktiebolaget SKF

General Industrials

Sweden

C4C

Aluminum Corporation of China


China

C4C

ARAMEX PJSC


Jordan

C4C

Arla Foods amba

Beverages

Denmark

C4C

Atlas Honda Limited

Automobiles & Parts

Pakistan

C4C

Attock Refinery Limited

Oil & Gas Producers

Pakistan

C4C

Auchan France

General Retailers

France

C4C

Bancaja

Financial Services

Spain

C4C

Bring Citymail Sweden AB

Media

Sweden

C4C

Broad Air Conditioning (in Chinese)


China

C4C

Broedrene Hartmann A/S

Forestry & Paper

Denmark

C4C

Caja de Ahorros y Pensiones de Barcelona (La Caixa)

Financial Services

Spain

C4C

Central Warehousing Corporation


India

C4C

China International Marine Containers Ltd


China

C4C

China Mobile Communications Corporation

General Industrials

China

C4C

China National Offshore Oil Corp. (CNOOC)

Oil & Gas Producers

China

C4C

China Ocean Shipping Group - COSCO


China

C4C

Congrex Group

Travel & Leisure

Sweden

C4C


270



Sector

Country

C4C/CDP

Consort NT (in French)


France

C4C

Coop

Food Producers

Switzerland

C4C

Copagaz Distribuidora de Gas Ltda- Grupo Zahran

Oil & Gas Producers

Brazil

C4C

COWI A/S

Support Services

Denmark

C4C

Daewoo Securities Co., Ltd.

Financial Services

Korea, Republic of

C4C

Danfoss Group


Denmark

C4C

Deloitte South Africa

Support Services

South Africa

C4C

Det Norske Veritas

Support Services

Norway

C4C

Development Bank of the Philippines

Financial Services

Philippines

C4C

DiGi Telecommunications Sdn Bhd

Mobile Telecommunications

Malaysia

C4C

Dudalina SA

Personal Goods

Brazil

C4C

EADS France

Aerospace & Defense

France

C4C

Ebro Puleva, S.A.

Beverages

Spain

C4C

EDF


France

C4C

Edita Sverige AB

Media

Sweden

C4C

El Corte Inglés, S.A.

General Retailers

Spain

C4C

Empresas Bern S.A.


Panama

C4C

ESKOM


South Africa

C4C

Esquel Group of Companies

Personal Goods

China

C4C

Esteve


Spain

C4C

Eulen,S.A.

Travel & Leisure

Spain

C4C

Euskaltel


Spain

C4C

Ferrocarrils de La Generalitat de Catalunya

Support Services

Spain

C4C

Fomento de Construcciones y Contratas, S.A.


Spain

C4C

Gas Natural Mexico


Mexico

C4C

Groupe Bial


Portugal

C4C

Groupe La Poste

General Retailers

France

C4C

Groupe ONET

General Retailers

France

C4C

Grundfos

General Retailers

Denmark

C4C

Grupo Abril - Abril S/A

Media

Brazil

C4C

Grupo Fidanque


Panama

C4C

Grupo Sos

Beverages

Spain

C4C

Haier Group Company


China

C4C

Hinopak Motors Limited

Automobiles & Parts

Pakistan

C4C

ICA

General Retailers

Sweden

C4C

International Industries Limited


Pakistan

C4C

IRH Environnement

Support Services

France

C4C

ITT Water and Wastewater AB

General Retailers

Sweden

C4C


271



Sector

Country

C4C/CDP

Kelani Valley Plantations Limited

Food Producers

Sri Lanka

C4C

Kikkoman Corporation

Food Producers

Japan

C4C

Koninklijke Philips Electronics N.V.


Netherlands

C4C

Korea East-West Power Co.,Ltd.


Korea, Republic of

C4C

Korea Land Corp.


Korea, Republic of

C4C

Korea Railroad Corporation


Korea, Republic of

C4C

KPMG, Cardenas Dosal, S.C.

General Industrials

Mexico

C4C

Kromann Reumert

Support Services

Denmark

C4C

La Prensa

Media

Panama

C4C

La Seda de Barcelona

Personal Goods

Spain

C4C

Li & Fung Limited

General Retailers

China

C4C

Lindex

General Retailers

Sweden

C4C

LM Ericsson

Mobile Telecommunications

Sweden

C4C

Loc Maria

Food Producers

France

C4C

Mane

Chemicals

France

C4C

Manpower

Support Services

US

C4C

Mansour Manufacturing & Distribution Group of Companies

Beverages

Egypt

C4C

Martha Tilaar Group


Indonesia

C4C

MAS Holdings (Pvt.) Ltd.

Personal Goods

Sri Lanka

C4C

MCI Group Holdings SA

Media

Switzerland

C4C

MediaCorp Pte Ltd.

Media

Singapore

C4C

Metito (Overseas) Ltd.


United Arab Emirates

C4C

Mitsubishi Chemical Holdings Corporation

Chemicals

Japan

C4C

Multibank

Financial Services

Panama

C4C

Narai Intertrade Co, Ltd.

Personal Goods

Thailand

C4C

New Zealand Post Group

General Retailers

New Zealand

C4C

NTUC Healthcare Co-operative Ltd


Singapore

C4C

OCBC Bank Ltd.

Financial Services

Singapore

C4C

Olympus Corporation


Japan

C4C

Osram GmbH


Germany

C4C

Pakistan Refinery Limited

Oil & Gas Producers

Pakistan

C4C

Pentland Group Plc

Personal Goods

UK

C4C

Perstorp Holding AB

Chemicals

Sweden

C4C

Piraeus Bank

Financial Services

Greece

C4C

Pranda Jewelry Public Company Ltd.

Personal Goods

Thailand

C4C

Primex

Support Services

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Chapter 15

GHG Emissions from the International Goods Movement by Ships and the Adaptation Funding Distribution Haifeng Wang University of Delaware, USA

ABSTRACT The GHG reduction from ships has attracted international attention. As the major transportation mode in international trade, how the reduction cost influences the international trade is becoming a major concern. How to allocate the funds collected from the emission regulation is also in controversy. This chapter summarizes the policy instruments under discussion in the International Maritime Organization and discusses the advantages of market based instruments. Using the Ship, Trade, Traffic and Emission Model, this chapter calculates the impact of ship-based GHG reduction cost on the international trade. The impact is small for most countries, but relatively large for small island countries, creating an equity issue ready to be resolved. The ongoing debate between the common but differentiated responsibility and equal treatment for ships principle is documented. This chapter proposes that all countries need to reduce GHGs but developing countries, especially small island countries, should get more benefits.

INTRODUCTION The transportation sector is the second largest source of CO2 emissions, accounting for more than 22% of the world inventory in 2005 (IPCC, 2007). DOI: 10.4018/978-1-60960-531-5.ch015

CO2 from ships has been an increasing concern in recent years. It accounted for more than 10% of CO2 emissions from the transportation sector in 2005. Furthermore, data from UNCTAD shows that the sea-based transport accounts for more than 80% of world freight transport in volume (UNCTAD, 2007) and contributes twice as much


GHG Emissions from the International Goods Movement by Ships and the Adaptation Funding Distribution

Table 1. CO2 Emission in 2020 and 2050 (Unit: Mmt) (Buhaug et al., 2009) Year 2020 2050

A1B

A1F

A1T

A2

B1

B2

1345

1293

1294

1188

1167

1114

3595

3644

3634

2878

2735

2449

Â€Â€Â€Â€Â€A1B: Balanced scenario across energy sources Â€Â€Â€Â€Â€A1F: Fossil-intensive scenario Â€Â€Â€Â€Â€A1T: A1T: Technologically advanced and predominantly non-fossil scenario Â€Â€Â€Â€Â€A2: Heterogeneous world with continuously increasing global population Â€Â€Â€Â€Â€B1: Increasing population growth with rapid change in economic structures Â€Â€Â€Â€Â€B2: Emphasis on local solution of economic growth and sustainability

to carbon emissions as does freight transport by air, even though shipping emissions are 40 times lower than air emissions per ton of freight (Buhaug et al., 2009). Except for the short term disruption due to global economic crisis from 2008 (The Economist 2009), international trade will not cease grow. The IMO projected the CO2 growth in year 2020 and 2050 under six scenarios used by the IPCC (Table 1). Under the business-as-usual scenario, CO2 from ships will be at least double between now and 2050. Because of the trade growth, faster ships, and fewer ship retirements, the emissions will be almost tripled at the worse scenario, showing how urgent it is to control and reduce CO2 from the maritime industry (Buhaug et al., 2009). CO2 is the most important Greenhouse Gas (GHG) among various GHGs emitted by ships. The total ship-based CO2 emissions were around 1,046 million metric tons or about 3.3% of the world total in 2007 (Buhaug, et al., 2009). Ships are one major source of some other GHGs as well (Buhaug, et al., 2009; Wang et al., 2009), including volatile organic compounds (VOC), methane (CH4), black carbon (BC), particulate organic matter (POM), nitrogen oxide (N2O) and carbon monoxide (CO). The emissions have been reported by the Marine Environmental Protection Committee (MEPC) under the International Maritime Time Organization (IMO), the major regulatory body of the international shipping industry (Buhaug et al., 2009). The MEPC is also the major platform where the international com-

munity discusses policy instruments to reduce ship-based GHGs. The international community has recognized that the shipping industry is one of the least regulated industries. The Kyoto Protocol has put most industries in most developed nations into a binding commitment to reducing GHG. However, the authority to regulate GHG from the shipping industry and the aviation industry was given to the International Maritime Organization (IMO) and International Civil Aviation Organization (ICAO), respectively. Since then, the MEPC has conducted several meetings to discuss GHG inventories and available policy instruments since 1996. The objective of this chapter is to review policies focusing on vessel-based GHG reduction and investigate the impact of regulation costs on vessel-based GHG reduction. The impact of GHG reduction costs on maritime industry and international trade will be discussed. It will also look at the fund distribution issue and the potential impact on various countries.

BACKGROUND Policy Options in Reducing Vessel-Based GHGs Policy makers and stakeholders have identified a number of policy instruments in reducing CO2 emissions, including the Marine Emission Trade System (METS), the International Compensation

275


Fund (ICF), the Energy Efficiency Design Index (EEDI), the Energy Efficiency Operational Index (EEOI), and the Ship Energy Efficiency Management Plan (SEEMP) (Buhaug, et al., 2009). METS is designed to ensure that the market determines the emission price. Ships can either choose to reduce CO2 directly or purchase the right to emit. The system enables ships with higher marginal abatement cost to buy the allowances at a lower price from the market. Two METS are under discussion, one is the METS only for ships (Closed METS), and the other is to incorporate the METS with other industries (Open METS) (Buhaug, et al., 2009; IMO 2009a). The proposed ICF authorizes state members to license the bunker suppliers within their territories, and these suppliers must be registered with the Compensation Fund Administrator (CFA). Flag Ships must purchase fuel only from a licensed bunker supplier and flag states could monitor such purchase. The money collected would be used by the CFA to operate the fund to reduce GHGs (IMO 2009b). EEDI can be applied to both new and old ships. The baseline EEDI is first decided for each type of ship. Based on the proposed formula, the EEDI for each ship is then calculated. The later EEDI has to be smaller than the baseline EEDI, otherwise ships are subject to a unattainable fee. EEDI is easier to facilitate and enforce given the simplified formula. EEOI, which was previously referred as the IMO CO2 index, is created to express the ratio between the emissions and the benefits derived from the ship transportation. It shows actual CO2 efficiency in terms of emissions of CO2 per unit of transported work. This can be a function of operating practice and vessel design. SEEMP is an energy efficiency improvement scheme developed by the IMO for ship owners and ship operators to be used at their discretion. SEEMP includes the promotion of best practices and other operational matters, improved cargo handling in port and fleet management, optimum

276

speed, trim, ballast, and hull design, along with improved voyage planning, weather routing, and just-in-time service. The latest trend in the MEPC is to consider combining some of these policy instruments. These hybrid systems make use of the advantages of each policy options. For instance, US propose to combine the EEDI with the credit trading system (IMO, 2010a). The World Shipping Council proposes to combine the EEDI with the ICF (IMO, 2010b). These proposals will be discussed in the latest MEPC meeting (MEPC60) in March 2010. The IMO also suggests that the selection of those policy options should consider environmental impacts, economic costs, administrative burdens, and the feasibility of implementation (Buhaug et al., 2009). These four standards enable GHG reduction policies to be cost-effective and applicable.

MARITIME TRANSPORTATION AND INTERNATIONAL TRADE Maritime transportation has been credited as one of reasons for the rapid growth in the post-war international trade (Baier & Bergstrand, 2001). Substantial cost reductions in marine shipping due to the containerization, economy of scale, and other technological breakthroughs have been one of the most important stimuli in propelling post-war international trade growth (Harley, 1988; Rose, 1991; Krugman, 1996). Countries with seaports are at an advantage in terms of economic growth and social development (Radelet & Sachs, 1999; Redding & Venables, 2004). In recent decades, to accommodate costumer demand and to reduce total cost, shipping companies have deployed larger and faster ships in order to achieving better service at a lower cost. This trend and the economic reasons behind it have been well documented in the literature (Cullinane et al., 1999; Lloyds Maritime Information System, 2007).


Emission reduction, however, generates cost. CO2 elimination cost from the international shipping industry will ultimately be transformed to the exporters and/or importers (Corbett and Wang 2009). There have been many discussions on how transport cost influences international trade (Limao and Venables, 2001; Martinez-Zarzoso, 2003; Anderson & Eric, 2004; Clark, et al., 2004). Most papers have reported that a 100% increase of transport cost reduces trade by 10% to 20% (Hummels, 1999; Kumar & Hoffmann, 2002). It is unavoidable that CO2 reduction cost inflates transport cost and decrease international trade. In such case, shipping emission reduction is not only a policy issue in the global maritime industry, but also a topic in international trade and even about the whole national economy, especially for those countries that are export-oriented. Therefore, the GHG emission reduction cost to the maritime transportation and international trade is especially important. The marginal abatement cost has been the key to selecting appropriate policy instruments to reduce CO2 emissions. The marginal abatement cost is defined as the derivative of total abatement costs with respect to the level of output (McConnell & Campbell, 2004). IMO indicates that the marginal abatement cost curve always considers the cost of reducing the emissions by the next ton of CO2, given the reduction that has been achieved by the options that have already been implemented (Buhaug et al., 2009). Some literature has calculated the marginal abatement cost with and without considerations of operational cost, capital cost, and service cost from ship emission reduction (Buhaug et al., 2009; Corbett et al., 2009; Eide et al., 2009; Kat et al., 2009). In this chapter, the impact of the marginal abatement cost on the transportation cost and the international trade will be investigated. The use of fund raised by such regulations will be discussed. The remainder of this article is divided as follows. Section 3 uses the 2005 trade data and STTEM model to calculate the impacts to the international

trade due to the global vessel-based GHG reduction regulations. Section 4 presents the debate as to how to collect the GHG fund and proposes the way to use and distribute the fund. Section 5 provides some concluding remarks.

THE IMPACT OF GHG REDUCTION COST ON TRANSPORATION COST AND INTERNATIONAL TRADE Market Based Instruments to Reduce Air Pollution Policy instruments to reducing air pollutions can be categorized into command-and-control approaches and market-based instruments (economic incentive) (Kolstad, 2000). One objective in choosing different emission reduction policies is to find the most cost-effective way. Therefore, the IMO is moving to adopt market-based instrument to reduce vessel-based GHG emission from the MEPC60 meeting. Market-based approaches are policy instruments that use price or other economic tools to provide incentives for polluters to reduce harmful emissions (Starvins, 1998). These tools include green taxes, subsidies, tradable permits, and others including deposit/refund systems, eco-labeling, licenses, and property rights. These instruments encourage behavioral changes through market signals (Helfand, 1998). Requiring all manufacturers or even all industries to the same reduction target can be very costly. This is one of the reasons why the commend-and-control measure is not welcome and economists generally favor the market based measures (Helfand, 1998). In theory, if properly designed and implemented, market-based instruments allow any desired level of pollution cleanup to be realized at the lowest total cost to society. Market-based instruments enable manufactures or all industries equalize the marginal abatement cost and marginal benefit. The high marginal abatement

277


cost has the potential to provide powerful incentives for companies to adopt cheaper and better pollution-control technologies (Stavins, 2002). A pollution charge is a fee or tax on the amount of pollution that a manufacturer or source generates. A big challenge with the pollution charge systems is to determine how to identify the appropriate fee/tax rate. The pollution charge also does not provide much needed certainty to environment either. The fee or tax should also achieve a reduction target from a baseline emission level. The polluter-pays principle is a widely used application for the pollution charge (Stavins, 2002). The emission levy (ICF) proposed in the MEPC functions just as the fuel tax. Tradable permits can provide a cost-minimizing allocation, which is similar to a tax/fee system (Tietenberg, 2003). Theoretically, tradable permits and tax/fees should have the same effect. Tradable permits help to avoid the problem of uncertain responses by firms and industries. Firms or industries that have lower marginal abatement cost may sell their surplus permits to other firms or industries or use them to offset excess emissions in other parts of their facilities. Tradable permits are now widely used in emission control policies. One of the most famous experiments is the emission trading system under the Kyoto Protocol for GHG mitigation (Tietenberg, 2003). The proposed METS, either the closed METS or the open METS belongs to this category. Government subsidy reduction is another category of market-based instrument. Subsidies, in theory, can achieve the same effect as pollution charges. The GHG charges by port states recently proposed by Jamaica in MEPC belong to this category. In practice, however, many subsidies promote economically environmentally inefficient practices (Tietenberg, 2003). As the IMO is expected to adopt the market based instrument to reduce vessel-based GHG emissions and the market measures in next two MEPC meetings, and if market works perfectly, these market-based instrument will yield the same

278

cost-effectiveness, this section will assume a $120 per ton CO2 reduction cost for the international shipping. In other words, the adopted market based instrument will cost ship $120 per ton marginal abatement cost no matter which measures policy makers adopt.

Methodology and Data: GHG Reduction Cost and International Trade in 2005 Historically, the IMO regulates ships by two measures: by ship flags and by geographic locations. In this section, a ship’s CO2 regulation regime is assumed to be based on geographical locations. In other words, countries that export commodities have to pay for emissions irrespective of the flag on the vessel transporting the goods. The dataset for this section is based on the Ship Traffic, Trade, and Energy Model (STTEM), which was first proposed by Wang (Wang & Wang, 2010). This dataset mainly focuses on the impact of GHG reduction cost on marine transportation cost and international trade related to the United States. Therefore this section will mainly use the impact to the United States as an example. The construction of the STTEM is shown in the Appendix. There are four assumptions on which the analyses of this section are based. First, to achieve a 20% CO2 reduction, which is the IMO’s interim target, the marginal mitigation cost is between $0-120 per ton, which is in line with the cost estimate in the IMO report. Although some literature has documented a negative marginal cost for CO2 reduction (Eide et al., 2009), the marginal abatement cost has been projected to be higher than existing CO2 market prices, if both capital costs and service change costs are considered (Buhaug et al., 2009; Corbett et al, 2009). This assumption is the key in this chapter and has its own limitations.


Figure 1. CO2 shares of different country groups

a. The assumption is a stationary analysis rather than a dynamic one. Although ships may respond to a fuel price change, for instance, by adjusting speed or improve in fuel efficiency, such a response is beyond the scope of this work and would require a much more complicated operational research. b. The arrangement that all CO2 needs to be purchased in the shipping industry would be a very stringent regulation in the GHG reduction. Usually, at least a portion of GHG emission rights are given away without any charge, which gives the industry windfall profits. Assumption two to four are related to the future scenarios. In other words, the results of the calculation have future policy implications only if these assumptions are met. Second, the average freight rate across different routes remains generally constant in the short term. This assumption is consistent with the observations from UNCTAD documenting that the average freight rates of U.S. ports are stable with few fluctuations (±15%). Third, the economic conditions are exogenous to voyage cost. Though the literature does suggest

that commodity price affects freight rates (Limao & Venables, 2001; Hummels et al., 2007), this assumption would seem to be valid since average ship speed has remained roughly constant in a short term (Lloyds Maritime Information System, 2007). Fourth, there are few short term changes in container fleet size. This too appears to be a valid assumption given the empirical data. Although there is no major technological barrier to containerships becoming larger in size, ports and other infrastructure would need time to adjust to larger fleets (Notteboom, 2004). Data in the Research and Innovative Technology Administration shows the average containership size (calculated as Deadweight Tonnage, or DWT) has few increases in some major U.S. containership ports between the years 2003 and 2005 (U.S. Department of Transportation Maritime Administration, 2003-2007).

Result Figure 1 reports the CO2 emissions by country groups. Non-Annex I countries have the most CO2 emissions (68%) because of the large number of voyages. For the economies in transition, although ships from these countries only accounted for 1%

279


Table 2. Top GHG emitters in international trade Country

Annex I

Total CO2 (Mmt)

Japan

Yes

7.886

South Korea

No

7.437

Hong Kong

No

4.781

China Mainland

No

4.415

Mexico

No

4.001

Canada

Yes

2.783

China Taiwan

No

2.642

Bahamas

No

2.104

United Kingdom

Yes

2.094

Venezuela

No

1.897

of total voyages, their emissions were more than 2% of total, showing the inefficiency of their ships and longer distances to the destination. Figure 1 investigates the CO2 emission among different country groups. In the following part of this section, the emissions and costs among different countries are calculated to evaluate the fairness of a universal CO2 price for all ships. Table 2 shows countries or territories with the most CO2 emissions from international trade to the United States. Not surprisingly, all of them are major trading countries or regions. The top four countries or regions are from East Asia, reflecting the booming trade relationship between East Asia and the United States and relatively long distances for ships to travel from origin to destination. Mexico and Canada, neighbors of the United States, are the 5th and 6th on the list of top emitters. Using the emission data and trade data, Table 3 shows the five countries with the highest CO2 cost per import weight. Table 3 demonstrates that countries most affected by CO2 price are small islands countries, which are also most vulnerable to global warming. But if regulations aimed at reducing CO2 are promulgated, these countries will be harmed as well, creating a dilemma for the international community. Therefore, whichever program that

280

Table 3. Countries with highest CO2 cost/import weight rate Country

Annex I

CO2 Reduction Cost/ weight (cents per ton)

Kiribati

No

1.00

American Samoa

No

0.19

Tonga

No

0.017

Benin

No

0.015

Grenada

No

0.005

international CO2 mitigation is based on, either the Common but Differentiated Responsibility principle or All Ship Equal Principle, the interests of small islands should be considered in particular. Table 4 illustrates the fund collections from the CO2 regulations divided by different country groups. It indicates that if ships are required to reduce CO2, the non-Annex I countries need to pay up to $16 billion, Annex I countries would need to pay up to $7 billion, and transition economies would need to pay up to $0.5 billion. Although ships from economies in transition only account for a small number of ships, transition economies need to pay the most in terms of charge per voyage in that their ships are the least efficient among all country groups. The total reduction cost is around $23 billion for ships calling at US ports alone. Developing countries pay most of them because they have most voyages to the United States. Developed countries have around 30% share in the total CO2 reduction cost. If a levy is used and all these costs

Table 4. CO2 fund contributions by country groups Country Group

CO2 (mmt)

Charges (million $ per year)

Non-Annex I

134

16016

Annex II

59

7097

Transition Economies

4.4

534


go to the GHG adaptation fund, then fund targeting at ships calling at US ports could raise around $23 billion, with the ratio between developing countries and developed countries roughly being 7:3. How to collect such fund and how to use it are becoming a big problem in current international shipping regulations.

THE CO2 FUND COLLECTION AND DISTRIBUTION The History of the Common but Differentiated Responsibility The current international negotiation to reduce GHG from ships is stalled by the debate that whether the Common but Differentiated Responsibility (CBDR) or Equal Treatment of All Ships should be applied. Developing countries are strongly opposed proposals to include ships in developing countries in the binding reduction plan for the international trade. The CBDR was first explicitly formulated at the 1992 UN Conference on Environment and Development. Rio Principle 7 states that in view of the different contributions to global environmental degradation, states have common but differentiated responsibilities. To solve the environmental problems in developing countries, the developing countries themselves need to take action, and they should also focus on capacity building. Stockholm Principle 9, for instance, asked for the transfer of substantial quantities of financial and technological assistance from developed states to developing states. The CBDR principle has been a widely accepted principle that underlines such international agreements like the Kyoto Protocol. The essence of the CBDR has two aspects. The first is the common responsibility, which is raised from the concept of common heritage and common concern of humankind and reflects the duty of States to equally share the burden of environmental protection for common resources;

the second is differentiated responsibility, which addresses the different social and economic situations across States (UNEP 1992). The CBDR is one of the cornerstones of another widely accepted principle “sustainable development.” Proclamation 4 of the Stockholm Resolution provides that “[i]n the developing countries most of the environmental problems are caused by under-development…Therefore, the developing countries must direct their efforts to development, bearing in mind their priorities and the need to safeguard the environment” (UNEP, 1972). The CBDR is also one of the cornerstones among nations in climate change agreements. The preamble of the UNFCCC acknowledges that the global nature of climate change calls for the widest possible cooperation by all countries and their participation in an effective and appropriate international response, in accordance with their common but differentiated responsibilities and respective capabilities and their social and economic conditions (UNFCCC, 1997). Article 3(1) of the Convention adds the leadership role that developed countries should take, and after reaffirming the principle of common but differentiated responsibility, the article states that “the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” (UNFCCC, 1997)Under the Kyoto Protocol, only countries listed in Annex I (developed countries and countries with transition economies) have binding emissions reduction obligations under the agreement. The UNFCCC and the Kyoto Protocol also establish and promote general obligations of cooperation including technology transfer and financial assistance for mitigation and adaptation to developing countries through the Global Environmental Facility (GEF). The GEF has two funds under the UNFCCC, the Special Climate Change Fund and the Least Developed Countries Fund; it also operates the Kyoto Protocol Adaptation Fund. They are mechanisms aimed at operationalizing the CBDR (Rajamani, 2002; Lucia, 2007).

281


The vessel-based GHG reduction negotiations, developing countries, led by China, India, and Brazil, argue that the CBDR must be fully respected and applied with regard to the reduction of GHG emissions (IMO, 2009c). Similar to land-based GHG emissions, these nations argue that the largest share of GHG emissions from international shipping has originated from the cumulative emissions from historical development in developed countries; therefore, it is the responsibility of the developed countries to take the lead in addressing ship-based GHG (IMO, 2009c). The CBDR is a widely accepted principle and should be viewed as the binding international law (IMO, 2009d). They also argue that the Equal Treatment principle, which is insisted by developed countries, should represent an obligation for Annex I countries and a recommendation for non-Annex I countries. This distinction is necessary to ensure compatibility between IMO negotiations and the international climate change regime. The CBDR thus can guarantee that all countries will contribute to the common effort in an equitable manner (IMO 2008a; IMO 2009d). What is more, the right of development is emphasized. Fuel consumption from ships should be deemed as “survival emissions” (China National Development and Reform Commission, 2007).

An Example: China’s Stance China is one of leaders in insisting applying the CBDR in the IMO negotiation. China heavily depends on the exportation to propel the economy, which until 2008 witnessed double digit growth. Among major trade nations, China is one of the highest export-dependent and its major exports include low-value manufactured goods with high elasticity (Yao, 2006). Making ships pay for their CO2 emissions may increase the transportation costs and export price, potentially undermining the competitiveness to other countries, especially to developing countries near major importers, such as Mexico. The CBDR provides an existing

282

means to resist the emission reduction effort in a binding form so that ships from China can mitigate the emissions in a gradual and cost-saving way. Therefore, in line with their attitude in the United Nation Framework Convention on Climate Change (UNFCCC), China wants the developed world to take the lead in reducing their emissions of greenhouse gases, while ensuring development rights and spaces for developing countries. China requests that developed countries should help developing countries to reduce CO2 emissions, providing funding and technological support (China National Development and Reform Commission, 2007). China argues that the principle of the CBDR has to be fully respected and applied in the IMO negotiations because it is a development issue in nature, indifferent from GHG reductions in other sectors. For the developing countries, the CO2 emissions from ships should be considered from the principle that the first and overwhelming priority for developing country to achieve its economic and social development and to eliminate poverty (China National Development and Reform Commission, 2007). In the China’s proposal to the MEPC, China acknowledges that it is very difficult to draw a clear line between the ships of Annex I countries and those of non-Annex I countries on the basis of the flags. With Brazil, India, Saudi Arabia, and South African, China proposes to regulate ships based on their true nationalities, in other words, the nationality of the person or company who owns the ships. Contrary from ship registrations, developed countries own more than 65% of the world DWT. China believes such methodology could be applied to distinguish the ships of Annex I countries from those of non-Annex I countries for mitigating the ship-based CO2 emissions.

The Equal Treatment for All Ships Unlike the developing countries, developed countries require binding agreement for all countries to reduce vessel-based GHGs based on the Equal


Treatment for All Ships principle. The equal treatment duty towards all ships implies that no party of the IMO is allowed to impose training, experience, or certification requirements to seafarers serving on board ships entitled to fly the flag of another state and engaged on near-coastal voyages in a manner resulting in a more stringent way for such seafarers than for seafarers serving on board a ship entitled to fly their own flag. Based on this principle, therefore, the GHG reduction from ships should be binding and equally applicable to all ships, thus requiring States to accept similar regulations and/or standards in other fora (Mankabady, 1973). Developed countries make it clear that only equal treatment can help to resolve GHG emissions (Buhaug et al., 2009). Most registered fleets presently fly the flags of non-Annex I countries. If ships are treated differently based on whether they are Annex I country flags or non-Annex I country flags, ships can easily change their flags to have a non-Annex I country nationality due to the flag of convenience in the shipping industry, which would nullify international effort to reduce GHG from ships (Buhaug et al., 2009).

The View of the SubDivision for Legal Affairs The Sub-Division for Legal Affairs in IMO identified no potential conflicts between the CBDR in Kyoto Protocol and Equal Treatment under IMO. Instead, they suggest that the IMO should use the Equal Treatment principle to guide future ship emission reduction negotiations (IMO, 2009e). The Sub-Division for Legal Affairs suggests that the Kyoto Protocol should be an agreement under the framework of the UNFCCC. The CBDR under Kyoto Protocol is a soft law. So it does not exclude the application of specific technical requirements and obligations developed pursuant to particular treaty law areas, such as the maritime law (IMO 2009e). The Kyoto Protocol incorporates the UNFCCC principle of CBDR in

the context of addressing climate change but is silent on international shipping and aviation. By comparison, IMO’s mandate is derived from the IMO Convention and United National Convention on Law of the Sea (UNCLOS); there are no conflict or jurisdiction subordinations between the two for developing nations on their flags (IMO, 2009e). They also suggest that Article 2.2 of the Kyoto Protocol recognize that IMO is the appropriate forum in which vessel-based GHG reduction regulation should be discussed and enforced. It restricts itself to imposing upon countries in Annex I the obligation to work through IMO to “pursue limitation or reduction of emissions of greenhouse gases” from international shipping (IMO, 2009e). They argue that concepts such as the CBDR have limit. The objective of achieving reduction or limitation of GHG emissions from ships engaged on international voyages cannot be accomplished if some ships are exempted from IMO ship-based GHG reduction regulations purely on the basis that flag ships fly (IMO, 2009e).

The View of the WWF and IMERS As a compromise, the World Wildlife Fund (WWF) and International Maritime Emission Reduction Scheme (IMERS) propose the application of market-based instruments with consideration of CBDR (IMERS, 2007; IMO, 2008b). The marketbased policy instruments generate revenues, and these revenues are then distributed to different country groups with different percentages. Developed countries would pay the reduction costs but only receive a limited amount. Other countries receive would more funds than they generate. The least developed countries small island developing states would receive the largest shares. The BRIC countries (Brazil, Russia, India, and China) would receive more than they have paid as well. The shares of revenue payment and receipts are listed in Table 5 (IMERS, 2007; IMO, 2008b). In this proposal, the disadvantage of the small countries caused by the CO2 reduction cost is

283


Table 5. Shares of revenue payments and receipts (The table is quoted directly from IMERS, 2007 and IMO, 2008)

Country Group

Share of Revenue Payment

Share of Revenue Receipts

Developed Countries

59%

5%

Economies in Transition (without Russia)

2%

3%

BRIC (Brazil, Russia, India, and China)

16%

30%

Least Developed Countries (LDCs)

1%

15%

Small Island Developing States (SIDS)

1%

4%

Other Developing Countries

22%

44%

offset by the extra rebates distributed from the central authority. The equity issue is resolved also since small countries, as illustrated earlier, are victims of the global warming more than the culprit of this problem. They deserve more help from the other parts of the world. Other developing countries get more than what they pay for the reduction cost. This gives other developing countries some extra money to address their domestic CO2 emissions and fully respect their right to development. Their export price will not be distorted due to the rebate. Therefore, they can continue to grow their export industry and the maritime transportation sector. The developed countries pay more than they get, in fully respect of the fact that the developed countries should take the major responsibility to the global warming and historically, they emitted far more CO2 from the shipping sector and major beneficiaries from export and the waterborne trade. Such an arrangement also respects the CBDR. The developed countries take more responsibility, developing countries get more benefits, and least developed countries get most. This arrangement or similar arrangement should be considered for future policy adoptions.

284

CONCLUSION The maritime transportation sector contributes significantly to the growing international trade. Reducing trade due to higher transportation cost has caused increasing concerns from the developing countries, which requires the right of development to be respected. Countries therefore are divided for different policy options. However, estimates have shown that the contributions of vessel-based CO2 reduction cost are small to the cost increase in the international trade. Big countries are especially well positioned. Small countries, at least small island countries will have severe losses due to the increasing trade cost, deserving more attention from the governments and international regulators. Both developing countries and developed countries have their concerns and both sides have legal ground in this issue. The WWF and IMERS proposal to solve this issue is a good start. It does not distort trade, addresses the equity issue that posed significant disadvantages to small island countries, make developed countries take more responsibility, and benefit developing countries more than they pay for. The proposal may not be adopted by policy makers, but it has the right direction as how to collect and distribute GHG fund from ships and address the CBDR issue at the same time.

REFERENCES Anderson, E., & Eric, W. (2004). Trade costs. Journal of Economic Literature, 42, 691–751. doi:10.1257/0022051042177649 Baier, L., & Bergstrand, H. (2001). The growth of world trade: Tariffs, transport costs, and income similarity. Journal of International Economics, 53(1), 1–27. doi:10.1016/S0022-1996(00)00060X


Buhaug, Ø., Corbett, J., Eyring, V., Endreson, Ø., Faber, J., & Hanayama, S. … Yoshida, K. (2009). Second IMO GHG study 2009 update of the 2000 GHG study: Final report covering phrase 1 and phrase 2. London, UK: IMO. China National Development and Reform Commission. (2007). China’s national climate change program. Beijing, China: NDRC. Retrieved on July 22, 2007, from http://www.ccchina.gov.cn/ WebSite/CCChina/UpFile/File188.pdf Clark, X., Dollar, D., & Micco, A. (2004). Port efficiency, maritime transport costs, and bilateral trade. Journal of Development Economics, 75(2), 417–450. doi:10.1016/j.jdeveco.2004.06.005 Corbett, J., Wang, H., & Winebrake, J. (2009). The effectiveness and costs of speed reductions on emissions from international shipping. Transportation Research Part D, Transport and Environment, 14(3), 593–598. doi:10.1016/j. trd.2009.08.005 Cullinane, K., Khanna, M., & Song, D. (1999). How big is beautiful: Economies of scale and the optimal size of containership, liner shipping: What’s next? Halifax, IAME Conference. Eide, M., Endresen, Ø., Skjoing, R., Longva, T., & Alvik, S. (2009). Cost-effectiveness assessment of CO2 reducing measures in shipping. Maritime Policy & Management, 36(4), 367–384. doi:10.1080/03088830903057031 Harley, C. (1988). Ocean freight rates and productivity, 1740-1913: The primacy of mechanical invention reaffirmed. The Journal of Economic History, 48(4), 851–876. doi:10.1017/ S0022050700006641 Helfand, H. (1998). Standards versus standards: The effects of different pollution restrictions. The American Economic Review, 81(3), 622–634.

Hummels, D. (1999). Toward a geography of trade costs. Retrieved from www.ssrn.com/abstract=160533 Hummels, D., Lugovskyy, V., & Alexandre, A. (2007). The trade reducing effects of market power in international shipping. (NBER Working Papers 12914). National Bureau of Economic Research. IMERS. (2007). Differentiated approach with innovative financing for adaptation. Retrieved on August 22, 2009, from http://www.ieta.org/ieta/ www/pages/getfile.php?docID=2781 IMO. (2008a). Prevention of air pollution from ships, submitted by Brazil. London, UK: MEPC58. IMO. (2008b). Prevention of air pollution from ships, submitted by WWF. London, UK: MEPC58. IMO. (2009a). International fund for greenhouse gas emissions from ships, submitted by Oil Companies International Marine Forum (OCIMF). London, UK: MEPC59. IMO. (2009b). Legal aspects of the organization’s work on greenhouse gas emissions in the context of the Kyoto Protocol. London, UK: MEPC58. IMO. (2009c). A methodology for establishing an emission cap in an ETS for international shipping, submitted by Norway. London, UK: MEPC59. IMO. (2009d). Prevention of air pollution from ships, submitted by China and India. London, UK: MEPC58. IMO. (2010a). Further details on the United States proposal to reduce greenhouse gas emissions from international shipping, submitted by United States. London, UK: MEPC61. IMO. (2010b). Prevention of air pollution from ships: Proposal to establish a vessel efficiency system submitted by World Shipping Council. London, UK: MEPC60.

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IPCC. (2007). [A synthesis report. Intergovernmental Panel on Climate Change. Geneva, Switzerland: UNFCCC]. Climatic Change, 2007. Kat, O., Cerup-Simonsen, B., Jakobsen, O., Pedersen, L., Petersen, J., & Posborg, T. (2009). An integrated approach towards cost-effective operation of ships with reduced GHG emissions. Rhode Island, SNAME Annual Meeting. Kolstad, D. (2000). Environmental economics. Oxford, UK: Oxford University Press. Krugman, P. (1996). Growing world trade: Causes and consequences. Brookings Papers on Economic Activity, 26(1), 327–337. Kumar, S., & Hoffmann, F. (2002). Globalization: The maritime nexus. Handbook of maritime economics. London, UK: Maritime Press. Limao, N., & Venables, A. (2001). Infrastructure, geographical disadvantage and transport costs. The World Bank Economic Review, 15(3), 451–479. doi:10.1093/wber/15.3.451 Lloyds Maritime Information System (LMIS). (2007). The Lloyds maritime database, Lloyd’s register. Fairplay Ltd. Lucia, V. (2007). Common but differentiated responsibility. Retrieved on August 22, 2009, from http://www.eoearth.org/article/Common_but_differentiated_responsibility Mankabady, S. (1973). The International Maritime Organization. London, UK: Croom Holm. Martinez-Zarzoso, J. (2003). Do transport costs have a differential effect on trade at the sectoral level? Applied Economics, 40(24), 1–13. McConnell, R., & Campbell, R. (2004). Microeconomics: Principles, problems, and policies. New York, NY: McGraw-Hill Professional. Notteboom, R. (2004). Container shipping and ports: An overview. Review of Network Economics, 3(2), 86–106. doi:10.2202/1446-9022.1045

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Radelet, S., & Sachs, J. (1999). Shipping costs, manufactured exports, and economic growth. Cambridge, UK: American Economic Association Meetings. Rajamani, L. (2002). The principle of common but differentiated responsibility and the balance of commitments under the climate regime. Review of European Community & International Environmental Law, 9(2), 120–131. doi:10.1111/14679388.00243 Redding, S., & Venables, A. (2004). Economic geography and international inequality. Journal of International Economics, 62(1), 53–82. doi:10.1016/j.jinteco.2003.07.001 Rose, K. (1991). Why has trade grown faster than income? The Canadian Journal of Economics. Revue Canadienne d’Economique, 24(2), 417–427. doi:10.2307/135631 Starvins, R. (1998). What have we learned from the grand policy experiment: Lessons from SO2 allowance trading? The Journal of Economic Perspectives, 12(3), 69–88. Stavins, N. (2002). Experience with market-based environmental policy instruments. (FEEM Working Paper No. 52.2002; KSG Working Paper No. 00-004). Retrieved from http://ssrn.com/ abstract=199848 The Economist. (2009). Sea of troubles. Retrieved July 31 2009, 2009, from http://www4.economist. com/displaystory.cfm?story_id=14133794 Tietenberg, T. (2003). The tradable-permits approach to protecting the commons: Lessons for climate change. Oxford Review of Economic Policy, 19(3), 400–419. doi:10.1093/oxrep/19.3.400 UNCTAD. (2007). Review of maritime transport. New York, NY/Geneva, Switzerland: United Nations Press.


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Delft, C. E. (2009). Technical support for European action to reducing Greenhouse Gas Emissions from international maritime transport. Delft: CE Delft.

UNFCCC. (1997). Kyoto protocol to the United Nation framework convention on climate change. Geneva, Switzerland: UNFCCC. U.S. Department of Transportation Maritime Administration. (2003-2007). Vessel calls at U.S. ports2003. Washington, DC: MARAD. Retrieved from http://www.marad.dot.gov/Marad_Statistics/index.html Wang, H. (in press). Economic costs for the compliance of non-annex I countries for CO2 reduction from ships calling at the U.S ports. Energy for Sustainable Development. Wang, H., Liu, D., & Dai, G. (2009). Review of maritime transportation air emission pollution and policy analysis. Journal of Ocean University of China, 8(3), 283–290. doi:10.1007/s11802009-0283-6 Yao, S. (2006). On economic growth, FDI and exports in China. Applied Economics, 38(3), 339–351. doi:10.1080/00036840500368730

ADDITIONAL READING Buhaug, Ø., Corbett, J., Eyring, V., Endreson, Ø., Faber, J., & Hanayama, S. (2009). Second IMO GHG study 2009 update of the 2000 GHG study: Final report covering phrase 1 and phrase 2. London: IMO. Corbett, J., & Fischbeck, P. (1997). Emissions from ships. Science, 278(5339), 823–824. doi:10.1126/ science.278.5339.823

Eide, M., Endresen, Ø., Skjoing, R., Longva, T., & Alvik, S. (2009). Cost-Effectiveness assessment of CO2 reducing measures in shipping. Maritime Policy & Management, 36(4), 367–384. doi:10.1080/03088830903057031 Endresen, Ø., Soergaard, E., Sundet, J., Daloren, S., Isaksen, I., Berglen, T., & Gravir, G. (2003). Emission from international sea transportation and environmental impact. Journal of Geophysical Research, 108(D17), 4560–4564. doi:10.1029/2002JD002898 IMO. (2009). A methodology for establishing an emission cap in an ETS for international shipping submitted by Norway. London: MEPC 59. IMO. (2009). International fund for Greenhouse Gas emissions from ships submitted by Oil Companies International Marine Forum (OCIMF). London: MEPC 59. IMO. (2010). Consideration of a market-based mechanism: Leveraged incentive scheme to improve the energy efficiency of ships based on the International GHG fund submitted by Japan. London: MEPC 60. IMO. (2010). A global emissions trading system for greenhouse gas emissions from international shipping submitted by United Kingdom. London: MEPC 60. IMO. (2010). Further details on the United States proposal to reduce greenhouse gas emissions from international shipping. London: MEPC 60.

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McConnell, R., & Campbell, R. (2004). Microeconomics: principles, problems, and policies. New York: McGraw-Hill Professional. McKibbin, W., & Wilcoxen, P. (2002). The Role of Economics in Climate Change Policy. American Economic Association, 16(2), 107–129. Ocean Policy Research Foundation. (2008). Research Study: The World’s Changing Maritime Industry and a Vision for Japan. Tokyo: Ocean Policy Research Foundation. Redding, S., & Venables, A. (2004). Economic geography and international inequality. Journal of International Economics, 62(1), 53–82. doi:10.1016/j.jinteco.2003.07.001 Tinbergen, J. (1962). Shaping the world economy: suggestions for an international economic policy. New York: The Twentieth Century Fund.

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Wang, C., Corbett, J., & Firestone, J. (2007). Modeling Energy Use and Emissions from North American Shipping: Application of the Ship Traffic, Energy, and Environment Model. Environmental Science & Technology, 41(9), 3226–3232. doi:10.1021/es060752e Wang, C., Corbett, J., & Firestone, J. (2008). Improving spatial representation of global ship emissions inventories. Environmental Science & Technology, 42(1), 193–199. doi:10.1021/ es0700799 Wang, H., Liu, D., & Dai, G. (2009). Review of maritime transportation air emission pollution and policy analysis. Journal of Ocean University of China, 8(3), 283–290. doi:10.1007/s11802009-0283-6


APPENDIX The STTEM makes use of ship empirical waterway data, maritime trade data, and ship attribute data. With minor modifications to account for different attributes, the model is generalized in Figure 2. This data for North American ship movement and trade are most easily available, so ship movement and trade in the United States are used as an example. Figure 2. The construction of the STTEM

The trade data comes from the Import Waterborne Data Bank published by the US Army Corp of Engineers for trade information. The dataset documents the trade value and weight carried by ships to the United States. It also records the export countries and ports as well as import ports and customs districts. The foreign port and domestic customs district pairs from the Import Waterborne Data Bank are matched with the Entrances and Clearances dataset described below, and refers to such pairs as the unique routes. The six-level Harmonized System (HS6) classifies the commodity types. The ship empirical movement data is from the US Entrances and Clearances dataset containing unique ship information (i.e., IMO number), which includes over 90,000 records of arrivals and departures involving US ports and ships in foreign commerce. It documents some of busiest shipping lanes in the world. Ship parameters such as power, speed, and ship size are from Lloyd’s ship registry data to match ship identifiers, and select information to specific ship voyages. Where ship power is missing, the values are estimated for each vessel type by regressing the relationships between GRT and NRT and between power and NRT. Where ship speed is missing, the values are estimated for each vessel type by regressing the relationships among speed, power, and NRT. The regression and results for GRT and NRT are shown in Table 6. The calculation of power and speed is

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shown in Table 7. For fishing ships, only 7 records are missing and Lloyds 2007 does not document the fishing ships. The missing speed and power are obtained by using the speed and power of other fishing ships with the similar or the same NRT and GRT. Table 6. Relationship among NRT, GRT, and DWT Ship Type

Number of ships

y as lnNRT, x as lnGRT

R2

y as lnNRT, x as lnDWT

R2

Bulk Carrier

10010

y=-0.95+1.04x

0.97

y=-0.92+0.98x

0.98

Container

4776

y=-0.70+1.00x

0.96

y=-1.42+1.05x

0.96

General Cargo

22316

y=-0.71+1.10x

0.98

y=-1.11+1.02x

0.97

Miscellaneous

14120

y=-0.67+1.04x

0.77

y=0.53+0.79x

0.77

Passenger

4390

y=-0.95+1.01x

0.97

y=1.23+0.88x

0.82

Reef

3957

y=-1.27+1.04x

0.95

y=0.13+0.90x

0.92

RoRo

2357

y=-0.66+0.96x

0.96

y=-1.24+1.08x

0.88

Table 7. Relationship among power, speed, and NRT

290

Ship Type

y as lnPower x as lnNRT

R2

y as lnSpeed, x1 as lnNRT, x2 as lnPower

R2

Bulk Carrier

y=3.64+0.56x

0.82

y=1.54-0.03x1+0.16x2

0.51

Container

y=1.27+0.91x

0.90

y=1.11-0.01x1+0.21x2

0.89

General Cargo

y=1.43+0.84x

0.89

y=1.23-0.04x1+0.21x2

0.80

Miscellaneous

y=4.25+0.53x

0.61

y=1.45-0.005x1+0.15x2

0.45

Passenger

y=4.03+0.62x

0.67

y=0.81-0.25x1+0.46x2

0.74

Reef

y=2.10+0.81x

0.84

y=1.13-0.03x1+.0.22x2

0.81

RoRo

y=3.37+0.64x

0.82

y=0.94+0.009x1+0.202x2

0.83

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Chapter 16

Emissions Trading at Work:

The EU Emissions Trading Scheme and the Challenges for Large Scale Auctioning Bernd Mack Deutsche Boerse, Germany Sabina Salkic Deutsche Boerse, Germany

ABSTRACT Arguably, the climate talks in Copenhagen in December 2010 did not deliver on the high expectations the world had raised for a post-Kyoto agreement. But the commitment to confront climate change at the highest level is beyond doubt. At the time of writing, the EU Commission is to propose a draft regulation on large scale auctioning in the European Union Emissions Trading Scheme (EU ETS) starting in 2013. Integrity and credibility of the EU ETS could be at stake if the EU Commission fails in setting proper grounds for auctioning. After introducing the foundations of cap-and-trade markets, the authors of this chapter confirm that the market architecture of the EU ETS is working and that secondary market trading is functioning. But they also illustrate frictions in price discovery and variability in pricing relations. This leads to the conclusion that efficiency and integrity of the emissions markets are particularly susceptible to institutional uncertainty and supply and demand constraints. Against this background the authors set out recommendations for integrating auctioning into the existing market infrastructure and institutions. This way, large-scale auctioning could ensure a smooth and effective supply of the underlying emission allowances into the markets. DOI: 10.4018/978-1-60960-531-5.ch016


Emissions Trading at Work

INTRODUCTION TO EUROPEAN EMISSIONS TRADING Arguably, the climate change talks in Copenhagen in December 2010 did not deliver on the high expectations the world had raised for a post-Kyoto agreement. But the commitment to confront climate change at the highest level is beyond doubt. To underpin its leadership claim and continued commitment to a global and comprehensive agreement for the period beyond 2012, the European Union recently reiterated its conditional offer to move from a set 20% to a 30% reduction of greenhouse gas emissions by 2020 compared to 1990 levels.1 Irrespective of the target level of reduction, the European Union Emission Trading Scheme (EU ETS) faces a fundamental change with the introduction of large scale auctioning for commitment periods starting from 2013.2 At the time of writing this contribution, the EU Commission is to propose a draft regulation on auctioning which is due for adoption by June 30, 2010.3 Integrity and credibility of the EU ETS could be at stake if the EU fails in setting proper grounds for auctioning as an integral part of the overall EU ETS market design. In short, a wrongly designed auctioning scheme could result in arbitrary liquidity shocks, excessive volatilities and distortions to secondary markets functioning.

Interactions with European Energy Markets Structural breaks and distortions in the EU ETS markets could have an impact on the adjacent European energy markets. Whilst many sectors of the economy are directly and indirectly affected by the price levels of emissions allowances, the energy sector continues to be the sector carrying the highest burden in terms of emissions reductions. Hence, the energy market is most sensitive to changes in price levels and volatility in carbon markets. From the beginnings in 2005 it has been

292

argued that the initiation of the EU ETS has resulted in a significant increase in electricity prices since emission allowances can now be considered as a direct production cost factor (Linares, Santos, Ventosa and Lapiedra, 2006; Smale, Hartley, Hepburn, Ward and Grubb, 2006). For example, there are early empirical findings for Germany and the Netherlands that, depending on the electricity generating technology employed, an allowance price of 20€ could result in an emission related power production costs mark up ranging between 3€ and 18€ per MWh (Sijm, Neuhoff and Chen, 2004). For the UK there are estimations that a 1% shock in carbon prices translates into a 0.42% shock in electricity prices (Bunn and Fezzi, 2007). Finally, there are some forward looking estimations for the Nordic area saying that in the second trading period from 2008 to 2012 the average electricity spot price might increase by 0.74€ per MWh for every 1€ increase per ton of CO2 (Kara et al., 2008) . Abstracting away from these empirical observations, it follows intuitive reasoning that electricity price levels and risk premiums in electricity markets are a function of the risk premium induced by emissions markets. In an emissions constraint economy the decision of an electricity producer whether to produce electricity in what capacities is closely related to the decision on when to abate emissions. For example, prior to the initiation of the EU ETS in 2005, the operators of a gas-fired power plant in Europe would have calculated the so-called spark-spread for deciding on whether to produce power (e.g., see Fiorenzani, 2006). This is defined as the net income from selling 1 MW of electricity and buying the gas required for generating it. Electricity producers would proceed with producing electricity only if the spark-spread was at least covering the running costs. Under the EU ETS the consumption of emissions allowances constitutes an additional production cost factor. Hence, electricity producers’ calculus is now based on the so-called clean-spark-spread, defined as the net income


from selling 1 MW of electricity and buying both the gas required for generating it and the corresponding number of emission allowances that ensure compliance. In an analogous manner, the calculus for a coal-fired plant in Europe is nowadays driven by the clean-dark-spread, i.e. the net income from selling 1 MW of electricity and buying both the coal required for generating it and the corresponding number of emission allowances. 4 Coal-fired and gas-fired plants reveal differing efficiency levels. Hence, price levels and volatilities in emissions markets became a major driver of the fuel switching decisions in the electricity sector.5 Also, within each category of fuel technology there are remarkable differences in carbon efficiency. Hence, emissions markets became a driver of the price levels and elasticity of electricity supply.

Prominence of Derivatives Trading The restructuring of the European electricity sector from a vertically integrated and tightly regulated industry to a more open and competitive market has created demands for derivatives at all levels of the value chain to manage price risks.6 While prior to deregulation, the price of power was set primarily by government agencies on the basis of generation, transmission and distribution cost considerations, now electricity prices and prices in the interconnected underlying markets for coal, gas, freight, oil, and emissions largely reflect economic fundamentals and market forces at a local and global level. A whole new set of stakeholders, demands, risks and opportunities led to the emergence of vividly traded derivatives markets across the European energy markets. In general, futures markets rather than spot markets are the leading source of price discovery in the European energy markets. This is consistent with results known from many financial and commodity markets.7 There is also empirical evidence of the efficient functioning of price and volatility transmission channels between

spot and derivatives markets as well as across markets.8 This holds in spite of the very different nature of the underlying commodities. Electricity prices, for example, are very volatile due to the unique physical attributes of electricity such as non-storability, uncertain and inelastic demand curves and very steep short-term supply curves (Deng and Oren, 2006; Weron, 2000). Hence, noarbitrage models to price futures and forwards are not applicable for electricity (Vehviläinen, 2002). For circumventing this problem, equilibrium considerations are applied and forward/futures prices are typically split into two components: a forecast on future spot prices and an expected electricity risk premium; the latter being a compensation for the risk of spikes frequently observed in spot and day-ahead electricity prices and unexpected demand and supply shocks (Bessembinder and Lemmon, 2002; Longstaff and Wang, 2004). To the other extreme, emission allowances are a perfect underlying to apply no-arbitrage pricing models. As storage of allowances is virtually costless and allowances pay neither interest nor dividends, a long futures position can easily be replicated by buying allowances on credit. In theory, futures prices for emission allowances should entirely be derived from the cost-of-carry no-arbitrage equation.

Institutional Design Challenges In contrast to theory, there is indeed a latent carbon risk premium comparable with and reinforcing to the electricity risk premium accounted for in pricing electricity futures. This risk premium results from substantial uncertainties in emissions markets with regard to politically contrived supply and demand disruptions in the underlying emissions allowances. This risk premium comes at a social cost. Market efficiency suffers and the cost of hedging and risk management increases for electricity producers and consumers alike. The uncertainty created by improper market design and discretionary political action is best illustrated

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with the disruptions on price levels and liquidity caused by the leakage of emissions data indicating an oversupply in April 2006 and later by restrictions on banking towards the transfer from the first to the second trading period in October 2007.9 From the beginning, the implementation of primary allocation methods for emissions allowances has also been a source of market uncertainty in the EU ETS. There has been a long-standing debate and power game all along the first and second trading phase from 2005 to 2007 and from 2008 to 2012, respectively. Arguably, free allocation brings about issues like rent-seeking behaviour and windfall profits in incumbent industries whilst also leading to perverse dynamics when free allocations follow for example the so-called grandfathering approach where free allocations are a function of past emissions (Hepburn, 2007; Neuhoff, Martinez and Sato, 2006). The policy response in the EU ETS is to stipulate increased auctioning. But given the sheer magnitude of volumes to be auctioned into the market in the third trading period starting in 2013, it is obvious that any decision on the design of the auction mechanism itself, on the contracts and instruments to be auctioned, on eligible access routes to the auctions and, finally, on the clearing processes will inevitably have an impact on the overall functioning of EU ETS markets. It is new territory that neither financial nor commodity markets have yet experienced. Beyond doubt, it is a potential new source of supply distortions and market uncertainty if markets are strained with an improper auctioning scheme. Whilst there is a fund of theoretical work and practical experience with stand-alone auctioning, there is no instance dealing comprehensively with the interdependencies between auctions and trading markets.

Structure of the Chapter In this contribution we aim at deriving an outline for an institutional auctioning design. Against the background that the integrity of competitive

294

secondary markets under the EU ETS deserves highest priority we set out recommendations for integrating large-scale auctions into the existing market infrastructure and institutions. The first subsection to follow defines the starting position in terms of the foundations of cap-and-trade emissions markets. Departing from the economics of cap-and-trade markets we introduce some considerations on the efficiency and distributional effects of alternative primary allocation mechanisms. The second to next subsection will demonstrate how theory turns out in real life carbon trading markets. It provides some insight into the EU ETS as it developed into the most actively traded carbon market globally. We introduce the market architecture in terms of secondary market infrastructure providers, institutions and instruments traded. The corresponding subsection on the functioning of secondary markets looks at some characteristic pricing and volume relations. There are some indications that the market is still susceptible to distortion and inefficiencies. Hence, institutional changes like the introduction of largescale auctioning should be implemented carefully. Finally, in the last subsection we derive some hands-on recommendations on the institutional implementation for large scale auctioning, the by far most demanding challenge ahead for the EU ETS. We draw the conclusion that auctioning should be an integral part of today’s market infrastructure in terms of trading venues and institutions to complement the efficient price discovery and allocation function of markets with a smooth supply of emission allowances into the market.

FOUNDATIONS AND ECONOMICS OF CAP-AND-TRADE MARKETS The use of market-based techniques for dealing with environmental problems was initially proposed in the seminal works of Coase (1960) and Dales (1968). Montgomery (1972) provided a


theoretical justification of why such an approach leads to an efficient allocation of abatement costs across various sources of pollution. A relevant development with particularly important implications is the establishment of emission (or carbon) allowance markets. The European Union with the EU ETS established under the presetting of the Kyoto Protocol’s three flexible mechanisms is probably the best example of a carbon constraint economy where emissions are capped, priced and exchanged through a market mechanism.10 In this subsection we will discuss some of the foundations and economics of implementing cap-and-trade emissions markets. We start with looking at the full picture of pricing fundamentals, then focus on the economic impact on electricity markets and, finally, we look at the interlinking of primary market allocation and secondary market trading.11

Pricing Fundamentals in Emissions Markets There is numerous research literature and empirical work on emissions pricing fundamentals and the drivers of pricing and trading activity across the energy markets.12 In general, the factors that determine the pricing of emission allowances are said to be •

•

•

macroeconomic factors like GDP growth which primarily drive the demand for energy and, in turn, electricity and emission allowances, climate factors like temperature and climatic conditions which also influence the demand for energy, and in turn, electricity and emission allowances, energy factors like the characteristics of the local generation fleet and the fuel switching costs and price levels of energy sources which all together drive the supply side of the energy markets and, hence, demands for emission allowances, and

•

institutional design factors like primary market allocations, sectors in the economy that are not subject to the emission caps or the inter-period transfer of allowances which drive both demand and supply as well as risk premiums in emissions markets.

In fact, the factors proposed by theoretical and empirical research are consistent with market practitioners’ perceptions. For example, Point Carbon, one of the major information sources in the market, continuously quotes macroeconomic and energy figures, such as the price of oil, natural gas and electricity, as well as seasonal deviations in temperature and rainfall in their daily reporting on the markets.13 These pricing fundamentals all transform into relations and transmission channels between the respective markets for oil, gas, coal, freight, electricity and emissions. In the following, we focus on the immediate interactions and interdependencies between electricity and emissions markets.

Cap-and-Trade Emissions Markets and Electricity Markets In general terms, an emissions allowance is the right or permit to emit a certain amount of CO2 in the respective compliance period. The amount is usually fixed at one ton of CO2. Emission targets are usually set as a percentage reduction from a historical level of emissions with the objective to reduce the expected emissions trajectory under a business as usual assumption. Since every emitter covered by the cap and trade scheme needs allowances and because allowances are scarce, they are valuable. If allowances are tradable the market clearance price reflects the balance of supply and demand. More precisely, it is the price where the marginal revenue from emitting one ton of CO2 equals the marginal cost of abating CO2 emissions by one ton. The supply curve and slope of allowances depends on how tight the cap

295


Figure 1. Derive target reduction for compliance period

Figure 2. Derive price point for emission allowances

in comparison to business as usual emissions. The demand curve and slope depends on how costly it is to reduce emissions to avoid having to purchase allowances in the market. In the following we illustrate the cap and trade market mechanism as a transmission channel in an emissions constraint economy. The reason to focus on the impacts in the electricity sector is twofold. First, for most economies the coal, gas and oil fired power generation plants are the largest commercial emitters and, hence, are most affected by emissions constraints. Secondly, electricity is a regional product where producers do compete with other regional producers subject to the same cap and trade regime but not with outside producers. Hence, electricity producers in a liberalized electricity market should be able to pass on emissions related costs to the wholesale and retail consumer. This differs in other industry sectors, where firms covered by the regime would have to compete with others outside the regime.14 We make the assumption that the electricity market is liberalized as it is more or less the case for most of the large electricity markets in the EU. It follows from this assumption that electricity prices should reflect the short run marginal cost of generation

which will include the cost of consuming emission allowances.15 Figures 1 to 3 illustrate the transmission channel in an emissions constraint economy from setting a certain cap on overall emissions x* (Figure 1) to deriving a market based price point p* where marginal revenues and marginal abatement cost per ton of CO2 are balanced (Figure 2) to finally arrive at an electricity price pE where the carbon uptick of p* times the specific efficiency factors is added to each generation technology of an economy’s electricity generation fleet. Figure 1 illustrates the equivalent of cumulative emissions in a business as usual scenario without emissions constraints denoted with xBAU. The cap xCAP, i.e. the maximum amount of emission allowances allocated, is defined for a certain compliance period Δ t. The target reduction x* results from the difference of xBAU and xCAP. The target reduction x* determines the scarcity in the emissions trading market and, hence, defines the price point p* in Figure 2. Since the aggregate marginal cost of abatement in the economy is not observable as such, the price point p* is the result of the individual firms calculus to balance the marginal cost of

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Figure 3. Derive price point for electricity with emissions uptick

abatement per ton of CO2 with the marginal revenues per ton of CO2 emissions. The latter is, in essence, the function of competitive emissions trading markets. Figure 3 shows how the price p* drives the electricity price by shifting and twisting the aggregate supply curve for electricity S to account for the opportunity costs of emission allowances. The price for electricity then results from the intersection of the electricity demand curve D and the electricity supply curve S after applying a cap. In Figure 3 we consider a generation fleet comprising five different technologies. The hypothetical merit order before taking the emissions uptick into account would essentially be reflective of fuel costs. The extent to which thermal plant generation costs increase depends on both the CO2 content of the fuel and the thermal efficiency of the generation technology. For this stylized fleet of generation plants, hydro and nuclear power plants would be cheapest, followed by lignite coal fired and anthracite coal fired power plants, and, finally, gas fired power plants. However, after taking the emissions uptick into account – i.e. adding the price p* per ton of CO2 times the specific efficiency factors for lignite coal, anthracite coal, and gas – the slope of the original merit order twists in favour of the more carbon efficient technolo-

gies. In our stylized example, gas and anthracite coal become more attractive because lignite coal combustion emits proportionately more CO2. In summary, carbon efficiency drives the slope of the supply curve for electricity in an emissions constraint economy. For example, a report from the German government, which was prepared in the course of benchmarking generation plants for the current compliance period, reveals some figures on relative efficiency of the different generation technologies (BMU, 2007). The CO2 consumption coefficients used as benchmarks in Germany are as follows: 365g CO2 per KWh for gas fired technology, 750g CO2 for anthracite coal fired technology, and 990g CO2 per KWh for lignite coal fired technology. Simply applying March 2010 price levels of German base load electricity of ca. 36 € per MWh and the respective European allowance price levels per ton of CO2 ca. 13 € per ton to these efficiency benchmarks, the emissions uptick added to the base running costs for gas fired technology would start in the range of 15%, the uptick for anthracite coal technology at about 37%, and the uptick for lignite coal technology at about 55%. So far we have analysed the price effects on competitive electricity markets in an emission

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constraint economy. At first glance, the producer surplus shrinks when considering the emissions uptick on the supply side. But the actual rent seeking and revenue distribution in an emissions constraint economy is, inter alias, dependent on the primary market allocation method, i.e. the choice for governments to sell the constraint amounts of emission allowances into the market at competitive prices or to allocate allowances for free to the relevant industry sectors. We will shed some light on this issue in the following considerations on primary market allocations and secondary market trading.

Primary Market Allocations and Secondary Market Trading Most cap-and-trade regimes start off with free allocations to emitters subject to the cap. Allocations are either based on their historical emissions, so-called grandfathering, or based on hypothetical emissions derived from efficiency factors, so-called benchmarking. For example, Article 10 of the EU Directive (EC, 2003) leading to the establishment of the EU ETS in 2005 specified that for the period 2005-2007 at least 95% of the allowances should be allocated free of charge and at least 90% for the current period 2008-2012. The energy industry is the largest sector in the scheme, responsible for more than half of total covered emissions (Christiansen, Arvanitakis, Tangen and Hasselknippe, 2005). However, this particular institutional design feature of free of charge primary market allocations and the setting and break down of the Member States’ emission caps is discussed controversially because electricity producers partly pass on for costing purposes the market value of freely obtained emission allowances to electricity consumers (Neuhoff et al., 2006; Ellerman and Buchner, 2006). Indeed, emission allowances are supposed to be scarce and, hence, valuable assets with a traded market price – no matter how they are initially allocated. Whether the emission allowances had

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been purchased for a price or received for free, the owner of the marginal electricity generation plant is always facing the choice between (1) generating electricity and incurring the fuel cost and disposing the respective amount of allowances and (2) staying away from generating electricity and selling both the fuel and the allowances in the respective markets for a competitive price. So, in either case – be it the primary market purchase through a government auction or sale, be it the secondary market purchase, or be it the free primary market allocation – the opportunity cost of disposing allowances for production is the same.16 Therefore, in the context of competitive liberalized markets it is economically rational for the electricity generator to either pass-through the opportunity cost of allowances disposed in the wholesale and retail electricity price or to sell the allowances into the secondary trading market for a competitive price. However, against the background of free primary market allocations in the initial two trading phases of the EU ETS, the free allocation led to massive windfall profits for the electricity sector.17 There seems to be more than a grain of truth in the provocative judgement delivered in Hepburn (2007) where he says that “free allocation is a regressive transfer of wealth from (relatively poor) citizens to (relatively wealthy) shareholders.” Many others have also expressed their concerns about those particular gains. Moreover, with respect to defining the national caps, EU Member States have been generous in allocating the emission rights, at least for the period 20052007 (Ellerman and Buchner, 2006; Böhringer, Hoffmann, Lange, Löschel, Moslener, 2005). As a consequence, the call for mitigating windfall profits from free primary market allocations was clearly and precisely raised early on in the debate on advancing the EU ETS (Grubb and Neuhoff, 2006; Whitehead, 2005). Windfall profits should not be confused with profits arising from over-allocation, meaning that certain industry sectors get more allowances then


they need. Provided that there is sufficient demand, companies from these sectors can sell the overallocation for cash in the market. Whereas windfall profits arise solely from the primary market allocation method, over-allocations arise solely from leniency in the setting of emission targets for certain industry sectors. That is to say, they arise from a politicised and biased sector break downs of the total allocation. For example, industry sources point out that towards the end of the second trading phase of the EU ETS (2008-2012) the industrial sectors are estimated to be overallocated by around 600 million allowances, whilst the electricity sector could be under-allocated by around 1260 million allowances. However, windfall and sector specific overallocation profits are intertwined. With stringent targets, electricity producers will still realize windfall profits because higher market prices for scarcer allowances imply higher opportunity costs to be passed on. Therefore, a more stringent emission cap does not necessarily reduce the size of the windfall profits, but might even increase those profits. Accordingly, if there is systematic over-allocation to some industry sectors, profits from over-allocation could also rise with more stringent caps. Sector specific over-allocation should not be confused with an ultimately loose cap, i.e. an economy wide over-allocation. In this case, over-allocation in principle should lead to a low – or zero – carbon price, resulting in low – or zero – windfall profits. This occurred, for example, in the EU ETS during 2007 after data on over-allocation had been published. We will discuss this incident in more detail further below. Beyond windfall and over-allocation profits, free allocations bring about additional social costs and adverse dynamics – no matter whether grandfathering or benchmarking is applied. Free allocations inevitably result in rent-seeking behavior by companies and industry organizations as they invest significant time and resources in lobbying for generous allocations. On the other hand, drawing allocation plans is undoubtedly

time-consuming and costly for government authorities. Moreover, it is also a risk that the target level of allocations is completely loose, as evidenced, for example, in the EU ETS during 2007. All of this has resulted in a more or less consensual approach within Member States to allocate relatively stringent emission ceilings to the electricity sector for the period 2008-2012. But for the period after 2012, the European Commission proposed to auction off all allowances to the electricity industry. An exemption was made for existing power generators in primarily Eastern European Member States, where the auctioning rate must be at least 30% in 2013 and 100% in 2020 (EC, 2009a). So, finally, auctioning of allowances appears to be the silver bullet for primary market allocations.18 There is a fund of literature on optimal auction design. Many practical experiences with public and private auctioning demonstrate that even minor design imperfections can have significant adverse effects on the results (Milgrom, 2004; Klemperer, 2004).19 Real world auctioning design needs to tackle issues ranging from bidder accreditation, auction integrity, information asymmetries, transaction cost to market abuse and collusion. However, in this contribution we will focus on the specific issue of designing primary market auctioning when there is active secondary markets trading as it will be the case for the large-scale auctions envisaged for the third trading phase of the EU ETS. There is only some research on similar issues in other markets (Bukhchandani and Huang, 1989; Zhoucheng Zheng, 2002). We devote the last subsection of this contribution on deriving some hands-on recommendation for implementing primary market auctions as an integral part of secondary markets. But before, we want to show the principle interaction between primary market auctions and secondary market trading. We assume for now that secondary markets are efficient and liquid and that there are no arbitrage barriers between auctions and secondary markets trading. In particular, there

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Figure 4. Auctioning without secondary market trading

is no difference in accessibility and transaction costs and there is no difference in the contracts auctioned and traded in the secondary markets. Without loss of generality, let us also assume that primary market auctions are implemented as repeated sealed-bid single-price auctions and that the full amount of allowances is auctioned, i.e. there is no free allocation. Figure 4 illustrates the clearance of such an auction when there is no secondary market. The market’s aggregated demand curve D A with negative price elasticity meets the auctioneer’s inelastic supply curve S A . The auction results in a clearance price p A where – unless there is insufficient demand – the total amount of allow-

Figure 5. Auctioning with secondary market trading

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ances x A is allocated to the bids with reservation prices above or equal to p A . In the absence of arbitrage barriers Figure 5 introduces the price discovery function of liquid secondary markets. It derives the secondary market clearance price p S as the intersection of the secondary markets aggregated demand curve D S with negative price elasticity and the markets aggregated supply curve S S with positive price elasticity. The frictionless and costless opportunity for bidders to satisfy their demand by buying in either or both of the secondary market and primary market auctions implies that the demand curve D A* in a scenario with secondary markets is truncated. Consequently, the auction price p A* should never be above the price p S observed in secondary markets. In fact, the auction clearing price should always be somewhat lower than the secondary market clearing price to compensate for the lack of immediacy in auctions compared to continuous secondary market trading. Obviously, primary market auctioning and secondary market price discovery are intertwined. Assuming efficient secondary markets and the absence of arbitrage barriers between the two, clearance of primary market auctions will be determined by secondary market price discovery and liquidity. We provide some insight on the question whether our strong assumption on secondary market efficiency holds for the EU ETS


markets in the following subjection by looking at the architecture, developments and market characteristics of the EU ETS.

of the EU ETS. We focus in this subsection on the market architecture and developments. Firstly, we introduce the variety of instruments traded. Secondly, we look at the variety of trading venues in secondary markets.

SECONDARY MARKET ARCHITECTURE

Choices of Instruments Traded

The EU ETS sets the framework for EU Member States to achieve compliance with their commitments under the Kyoto Protocol during 2008–2012. While the Kyoto Protocol allows trading between governments starting in 2008, the EU ETS breaks down emissions trading to the company level. With the launch in January 1, 2005, of its preparative initial trading phase from 2005 to 2007 each ton of carbon emitted in Europe by about 11,500 energy intensive installations in Europe has been priced.20 Most important combustion entities – in particular the strongly impacted electricity producers – manage their compliance between their allocation and annual verified emissions by buying or selling emissions allowances. Since emissions allowances became a tradable but risky asset, a variety of risk management and funding instruments was made available to the market. This pulled in financial intermediaries in their multiple capacities ranging from funding and brokerage services to market making and derivatives structuring. It also pulled institutional investors into the markets seeking alternative risk taking and investment opportunities. Both, the financial intermediaries and the institutional investors, are common and major constituents to global and regional energy markets. By exploiting temporary market disequilibria and arbitrage opportunities across markets, they ensure efficient price discovery and implicit co-integration of energy and emissions markets. All of these aspects – the interdependencies and connectedness of markets as well as the multifaceted activities of commercial and financial traders – shaped the secondary market architecture

It is inevitable that the diversity of institutions and enterprises exposed to emissions markets under the EU ETS creates demands for trading instruments other than the underlying emissions allowances themselves. There is active trading in derivatives along the forward-curve to meet the energy markets’ demand for long-term risk management tools. The legitimate fundamental economic functions of derivatives markets are price discovery and the transfer of risk from those exposed to it but who do not want to bear it (i.e. hedgers) to those not naturally exposed to it but willing to bear it (i.e. speculators). Intermediaries support these functions by structuring tailored instruments and by providing liquidity to the markets. As it is the case for adjacent energy markets – and more generally for all financial and commodity markets – derivatives on emission allowances are traded in a variety of ways. Standardized derivatives such as futures and options are listed and traded on exchanges. Bespoke derivatives contracts to suite specific hedging and speculative objectives are traded over-the-counter. The coexistence of centralized exchange markets that trade highly liquid standardized derivatives and over-the-counter markets that trade more customized but less liquid derivatives contracts permits market users to make a choice based on their preferences. There is a symbiotic relation between the diversity of institutions and markets. The existence of liquid and transparent exchange markets is an absolute condition for the ability to structure more complex and customized derivatives. Neither industrial hedgers nor speculators nor financial intermediaries would be able to price risks and

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mark-to-market complex exposures without the unbiased forward curves discovered in liquid exchange markets. To manage their risks effectively they must be able to lay off risks in exchange markets which provide immediacy and market depth. Hence, exchange markets and their adjacencies are the most sensitive elements in the European emissions and energy market ecosystem. The underlying instrument of the EU ETS markets is the European Union Allowance (EUA) – a fully fungible and tradable permit to emit one ton of CO2 equivalent. EUA are issued by Member States. Each Member State has its own registry for accounts transactions. Furthermore, there is a European Central Administrator which maintains the Community Independent Transaction Log (CITL) overarching the national registry systems. The CITL is standardized under European legislation. EUA are fully fungible across national registries. To participate in the trading of the underlying EUA it is necessary to have an account with at least one of the national registries. Access to registries is not limited to the more than 11.500 energy intensive installations covered under the EC (2003). In principle, any private, public, corporate or institutional investor is – subject to certain eligibility criteria to protect the integrity of the market – allowed to open accounts with a registry and to transact in the underlying EUA on any of a variety of trading venues. •

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EUA are issued for a certain compliance period, i.e. their lifetime spans from issuance to the presentation for demonstrating compliance.21 Non-compliance with the obligations will imply a penalty of 40€/ ton of CO2 produced without allowances for the first trading phase from 2005–2007, and 100€/ton of CO2 for the second phase from 2008–2012.22 Economically, holding EUA does not yield any interest or dividend during their lifetime. Returns from holding EUA materialize either when they

are presented for compliance or when they are sold for a market price. Hence, the rationale for buying, selling and holding EUA in advance of the respective compliance date would be to manage price risk – in particular, to mitigate the risk of severe supply shortages before the compliance date. Running an inventory of EUA in advance to the respective compliance deadlines implies an opportunity cost for the foregone interest on the capital locked up. This holds also when all or part of the EUA were received for free. In addition to trading EUA in the spot market with immediate exchange of title there is wide range of derivatives traded on EUA like for example forwards, futures, swaps, and options. In the context of our considerations we focus on futures as the most liquid instrument traded. Futures trade at a margin, i.e. futures provide means to manage price risks of an underlying without locking up the full capital actually investing in the underlying. Futures – by means of a clearinghouse – guarantee delivery of the underlying at expiry. A future is an exchange-listed and centrally cleared standardized financial contract where the buyer (long position) has the obligation to purchase the underlying from the seller (short position) at a pre-defined price at predefined future date. In general, futures on EUA have annual delivery dates, i.e. contracts expire in December of each year. As we discuss in detail further below exchange-listed futures can be traded on-exchange as well as off-exchange. Off-exchange trading means that trades in exchange-listed contracts are brokered outside of the exchange but still registered with the exchange and settled through the exchange’s clearing facility. Hence, off-exchange traded futures are counted as exchange volumes. Resulting contracts are fully fungible with exchange traded contracts.


Choices of Trading Venues There are several trading venues and market places where it is possible to trade EUA and/or futures thereof. EUA can be traded in spot markets such as BlueNext (Paris), Energy Exchange of Austria (EXAA, Vienna), NordPool (Oslo) and European Energy Exchange (EEX, Leipzig). There is also a pan-European platform called Climex Alliance where it has been possible to trade spot contracts since July 2005. Spot trading means that the actual EUA is traded and delivered from the buyer to the seller immediately within a reasonably short settlement period. Furthermore, in NordPool, European Climate Exchange (ECX/ICE Futures, London) and EEX, it is also possible to trade derivatives contracts with EUAs as the underlying commodity. The ECX with a market share of 76% of the total 50 billion ton traded across EUA futures and spot markets is by far the most liquid futures market. BlueNext with a market share of 22% was dominating spot trading in 2009.23 It is important to note that the European Commission considers that the number of markets in which to trade the European Union Allowances should be appropriate from the point of view of the agents participating in them. This means that each country can create its own market or that different private trading platforms can be organized. So, although there is a sole European emissions market, trading can be done through different markets around Europe. In all markets the underlying asset is the EUA but the spot and futures contracts that can be traded are slightly different. Pricing relations between the different venues suggest that this approach did not hamper efficient and transparent price discovery. Price differentials can, in general, be explained by differences in contract design and in post trade processing. This competitive and decentralized bottom up approach to form the market architecture delivered on three key drivers for market success:

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•

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Time-to-market and low entry barriers: The spot and futures emissions markets emerged in the shipping channels of established energy and electricity markets. The early movers NordPool, EEX and ECX made maximum use of existing trading and post-trade processing infrastructure and connectivity of their respective core markets in electricity for EEX and NordPool and in energy for ECX with ICE Futures. Market participants were able to plug-andplay, i.e. to trade emissions markets side by side via their existing connectivity to the European energy markets. Market and cost efficiency: The technical and functional integration with existing exchange markets delivers synergies on all layers of the market’s value chain. In particular, it leverages cross-market synergies on the clearing layer.24 The multilateral clearing of trades also allows for the standardization of processes and legal arrangements and the pooling of collaterals. Finally, the variety of exchanges and clearinghouses ensures competitive pricing of trading and clearing services. Competition and Innovation: As it is the case for most other energy markets there is fierce competition on pricing as well as on product innovation between exchanges but also between exchanges and Inter-DealerBrokers (IDB) to attract trading flows. In fact, off-exchange trading in exchangelisted and centrally cleared futures dominated by far the early days of futures trading under the EU ETS.

Horizontally, the current market architecture of the EU ETS as depicted in Figure 6 spans from regulated exchange markets to IDB venues. Almost all of the exchanges launched emissions trading as an add-on to their market presence in other product classes in the energy markets – particularly to electricity trading. In this respect,

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Figure 6. Secondary market architecture of the EU ETS

the IDB venues are the most diversified. They essentially offer any product class from oil, coal, gas, electricity, freight to emissions. In contrast to exchanges they also arrange trades in bespoke and structured instruments. Vertically, it covers the whole value chain spanning from trading to clearing and, finally, to settlement and account keeping. Again, most of the entities offer multiple product classes and, hence, can offer cost-efficient transacting across product classes. Clearinghouse services are offered for futures and options only but not for structured instruments. Finally, trading in European energy markets including emissions reveals a distinctive feature. There is a common market front end provided by a firm called Trayport which virtually aggregates liquidity in all instruments across different venues. Figuratively, there is one screen where a trader can trade any instrument and market across all energy related product classes.

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SECONDARY MARKET FUNCTIONING In the following we look at some characteristics of emissions trading markets under the EU ETS. We aim at challenging the robustness of the price discovery function and the reliability of some characteristic pricing relations in secondary market trading. In this respect, we look at the development and variability of prices, returns and daily volumes – in both on and off-exchange trading. We also look at the interconnectedness of emissions markets by exemplifying some price relations between spot and derivatives markets as well as between power and emissions derivatives contracts. The variability of returns and pricing relations highlighted in the following sample of observations is of particular relevance for our later considerations on the design of large-scale primary market auctioning.


Figure 7. Price curves between April 05 and February 10 of ECX EUA futures with annual maturities from December 2005 to December 201225

Prices and Returns From the very beginning there has been active futures trading under the EU ETS. As highlighted above futures volumes and liquidity continue to be far ahead of spot markets. There is early demand for long-term hedging strategies across the energy markets far before the actual start of the compliance period. As the price curves in Figure 7 show, futures trading in the respective contracts starts far before the actual issuance and trading in the underlying EUA. In he following we use data from the ECX, the most liquid futures market under the EU ETS. Observing the price curves in Figure 7 there are some noticeable adverse patterns. The EUA price experienced strong price changes in the pilot phase 2005-2007. After fluctuating heavily in the range between 20 and 30€ from mid 2005 to March 2006, prices for the DEC 06 and DEC 07 maturities as well as the already traded DEC

08 and DEC 09 maturities peaked just above 30€ towards the end of April 2006. Although there was early suspicion of over-allocation, the market got caught by surprise by the simultaneous information revelation by a number of EU Member States of lower than expected 2005 emissions. Prices across outstanding maturities fell by about 54% in four days. First and second period contracts still moved in tandem, but the DEC 06 and DEC 07 contracts were hit harder since being subject to delivery in the pilot phase. By October 2006 prices had recovered and got almost aligned across outstanding maturities in the range from 15€ to 20€. However, DEC 06 and DEC 07 continued to trade at a small but observable discount compared to contracts with maturities in the second compliance period from 2008-2012. The next incidence when institutional interference hit the market was in October 2006. Firstly, EU Member States finally confirmed that there would be no banking of EUA from the first to

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Figure 8. Logarithmic returns of EUA DEC 08 futures contract traded at ECX26

the second compliance phase. This created a discontinuity in supply of EUA between the phases. Secondly, the EU Commission announced stricter second phase allocations. From this incidence, the futures prices responded to different dynamics. Owing to the over-allocation, contracts with maturities in the first phase declined towards zero and finally settled at the end of the compliance period in December 2007 at a price of 0.01€. In contrast, contracts with maturities in the second phase increased to 20€. By December 2007 they traded at a 25€ level. The pricing of futures contracts between the distinct trading periods as well as between first phase spot prices and second phase futures prices became completely disconnected. In summary, the supply and demand in the EU ETS form up within constraints set by the EU Member States and the EU Commission. This creates a level of institutional uncertainty and risk usually not present in other trading markets. Consequently, there is a specific risk premium in emissions markets charged for institutional uncertainty. This risk premium surfaces in various facets like, for example, strongly fluctuating returns and highly volatile daily trading volumes. Figure 8 shows the log returns of the DEC 08 futures contract throughout its lifetime. The contract was fully hit by the incidences discussed above. Accordingly, daily returns experienced

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extreme oscillations in the respective periods in 2006. However, a simple visual inspection of the graph reveals three of the stylized features of emissions prices: mean reversion, short-term periodicities and spikes. Similar characteristics can be found in short-term electricity contracts (Daskalakis, Psychoyios and Markellos, 2009; Geman and Roncoroni, 2006). But log returns of electricity with comparable maturities oscillate at a slightly lower level. Yearly base load futures traded on the EEX show daily return variability in the 5% to 6% range. Consequently, the remarkably high oscillations of returns observed in emissions markets are in part a spill over from the electricity adjacencies. But they are also a result of the institutional design uncertainties and frictions.

Interaction of On- and Off-Exchange Trading At a first glance, Figure 9 shows that daily volumes have grown continuously and so has liquidity. Reasonable levels were already achieved in 2007, when daily volumes on ECX started to average above the 5 million. After scratching the 20 million tons average at the beginning of 2009, daily averages now seem to be at around 15 million tons. But Figure 9 also shows two remarkable characteristics, the volatility of daily volumes and the


Figure 9. Daily off- and in-exchange volumes in ECX EUA Futures with annual maturities from December 2005 to December 201227

varying shares of on- and off-exchange traded volumes: Firstly, it is still kind of a regularity that daily futures trading volumes jump up or down by a 100% and more from one trading day to the next. Spot market volumes show patterns of variability similar to futures markets. Average daily trading volumes in the most liquid market at BlueNext sometimes peaked at almost 10 million tons in the first half of 2009. Today, daily volumes average at about 2 million tons a day. But still, daily jumps of more than 100% are for sure not exceptional. Secondly, characteristic patterns can be observed in Figure 9 where extreme increases in daily volumes are accompanied by relatively high shares of off-exchange trading compared to on-exchange trading. Such patterns suggest that off-exchange trading venues attract relatively more trades when trading activity is high. As Figure 10 shows, off-exchange trading in exchange-listed and centrally cleared futures contracts is a common characteristic of emissions and electricity markets. Trading off-exchange through IDB venues offers the advantage that combinations of trades can be arranged simultaneously. This is, for example, very attractive if a trader wants to trade the clean-spark-spread or clean-dark-spread with

minimal execution risk. A broker would provide this service by simultaneously arranging the three legs of the spread transaction, i.e. by legging into the gas, emissions and power market at once. The fact that an even higher share of electricity contracts is traded off-exchange suggests that spread trading with electricity could be one of the reasons for emissions trading volumes moving off-exchange. Finally, there is also good reason to assume that in periods where market liquidity and prices are under stress it is less risky to have an IDB working larger orders off-exchange compared to exposing such orders in a transparent exchange order book market. Eventually, the variability of daily volumes across spot and futures markets together with the remarkable shifts between onand off-exchange trading hint at relatively high levels of uncertainty and frictions in the market.

Interaction of Spot and Futures Markets New commodities and financial markets need time to achieve reliable and efficient price discovery. We look at the relation between spot and futures prices to provide some further evidence on the conjecture that there is still remarkable variabil-

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Figure 10. Relative share of on-exchange traded volumes across ECX emissions and EEX electricity futures markets28

ity in pricing relations in emissions markets. We analyse this price relation against the assumption of arbitrage free market interactions between spot and futures markets. EUA are storable at virtually no cost and they neither yield interest nor dividends. Assuming efficient and arbitrage free interaction between spot and futures markets the futures price should equal the spot price times the compounded interest for holding the underlying EUA in stock until expiry of the future contract. However, in many markets a significant part of spot market demand is driven by risks of supply shortages in the underlying. Holding the underlying in stock then pays the so-called convenience yield. Positive convenience yields are typical in markets, where the underlying is continuously needed in production processes and even short-term supply shortages would be very crucial. •

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The difference between spot and futures prices is commonly referred to as the basis and is simply defined as spot price minus futures price. Obviously, the basis turns negative when the convenience yield is

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smaller than the interest rate. It turns positive when the convenience yield is higher than the interest rate. It follows from the no-arbitrage relation that the cost-of-carry and, hence, the basis converges to zero with approaching expiry of the respective futures contract. In theory, the convenience yield for EUA should be very low to zero in all periods other than just before compliance deadlines where there could be high uncertainty about the actual amount of EUA floating in the market. Hence, the basis and costof-carry should be driven primarily by the interest and, hence, should present a relatively smooth curve converging to zero at final settlement of the respective future.

In Figure 11 we show the development of the basis for the DEC 09 contract traded at ECX. The basis is calculated against the spot EUA for period from 2008 to 2012 traded at BlueNext. Visual inspection of Figure 11 provides only some sense of a negative basis converging to zero at maturity in December 2009 for the DEC 09


Figure 11. Development of Basis of the ECX EUA DEC 08 and DEC 09 futures against the BlueNext spot contract for the compliance period 2005–200729

futures contract. Thus, it confirms the notion that the convenience yield is generally smaller than the interest rate. But above all, Figure 11 shows oscillations and a high variability of the pricing relation between spot and futures markets which can not be explained just by changes in the costof-carry. Temporary disequilibria caused by pricing inefficiencies and uncertainties over the supply and demand constraints seem to have a considerable influence on the pricing relation. This observation confirms the general conjecture that the EU ETS is working well, but its efficiency and integrity is still susceptible. The level of fuzziness in this price relation could, in part, be ascribed to the uncertainty over politically induced supply and demand constraints.

Interaction of Electricity and Emissions Markets In the second subsection on the foundations and economics of cap-and-trade markets we have demonstrated how the price for emission allowances transforms into an uptick on electricity prices. Departing from this fundamental relation one should expect to find a strong positive correlation between emission and electricity price levels in real live markets. Testing various periods we found only a few occasions where a linear regression analysis

to capture the marginal price changes in the two markets delivered satisfactory results.30Figure 12 shows a regression analysis for the trading period between January 2009 and December 2009. In this sample, the t-test statistic confirms significance in the positive slope parameter with a more than 99% confidence. But with a value of 0.1163 for the coefficient of determination the regression test reveals a high proportion of variability in the suggested price relation. Hence, the pricing relations between electricity and emissions markets seem to reveal similar levels of variability as we exemplified before for the interaction between spot and futures markets. At this point, we would conclude with Reinaud (2007) that there is no universal answer on how emissions prices exactly affect electricity prices and empirical estimates of pass-though rates remain tentative. Among other factors, the relationship between electricity and emissions prices also hinges on the industrials’ power purchasing strategies as well as on the potential use of market power by electricity generators. Again, the variability in this pricing relation confirms our general conjecture that the price discovery function in emission markets is still susceptible and, hence, particular attention needs to be paid on secondary market functioning and integrity when designing large scale auctioning.

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Figure 12. Regression analysis for the EUA DEC 09 futures contract traded at ECX and the PHELIX JAN 10 Yearly Base Load futures contract traded at EEX31

DESIGN CHALLENGES WITH LARGE-SCALE AUCTIONING

Sensitivity of Secondary Markets to Supply Shortages

The discussion of the architecture and some market characteristics in the last preceding subsection suggests that, in principle, the EU ETS is working well. But the high levels of variability in returns, trading volumes, and pricing relations also suggest that the integrity and efficiency of the EU ETS markets are still susceptible. Hence, secondary markets functioning and integrity demand special attention with regard to institutional design uncertainty and arbitrary supply and demand constraints. The event of auctioning of large volumes into secondary markets in the third trading phase, even if the most frequent daily allocation method is implemented, represents a unique challenge in terms of preserving integrity, credibility and functioning of the overall EU ETS scheme. This holds even more given the existence of pronounced variability between energy markets as well as between spot and futures markets. In the following, we will derive some high-level recommendations to meet the institutional design challenges arising with large-scale auctioning in the third trading period of the EU ETS and its impact on secondary market emissions trading.

The protection of market integrity deserves particular emphasis. It would be detrimental to the reputation the EU ETS has built up globally if the auctioning design would become a potential source of massive dry-ups of liquidity in emissions markets prior or during auctions or if it would provide a leeway for potential market manipulation and abuse. Both would have severe impacts on the liquidity and immediacy in adjacent power, gas and coal markets. The susceptibility of emission derivatives markets to manipulation and abuse caused by wrongly designed auctioning is best exemplified by a potential market power manipulation also known as a cornering or squeezing the market.32 In a squeeze a single market participant or colluding group of participants would accumulate a long forward or futures position that is larger than the amount of underlying emission allowances that can be supplied at a fair price by those participants holding short positions. As a consequence, the supply curve of allowances available for delivery slopes up dramatically and the holders of short positions are forced to close-out futures positions at premiums far above the competitive price; all

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to the benefit of the long position holders who engineered the squeeze. Naturally, periods of low supply are most proper for squeezes. With respect to emissions markets, incidences of low supply would immediately depend on the frequency and timing of auctioning allowances into the market. Hence, secondary emissions markets may be particularly susceptible to squeezes when auctioning of allowances occurs relatively infrequently and discretionary. Similarly, restricted access to auctions would also play in favour of those wanting to engineer artificial supply shortages in the markets’ underlying. In conclusion, the interplay between auctioning and secondary markets functioning in the European energy markets plays a critical role. As a consequence, it is recommendable for auctioning to become an integral part of the overall market design – with continuous and efficient price discovery taking place in secondary markets, while smooth and effective supply of the underlying takes place through auctions.

From a market efficiency and liquidity consolidation perspective it is intuitively advisable that only instruments are auctioned which are traded in liquid secondary markets. Otherwise, auctioning would provoke parallel markets in similar but different instruments. Secondary market liquidity would become fragmented. Eventually, efficiency and integrity of the price discovery function would suffer. Thus, the choice is limited to spot allowances and listed futures contracts. Whilst spot auctioning of emissions allowances is straight forward and unobjectionable, auctioning of futures requires some further considerations: •

Design Principles for LargeScale Auctioning in the EU ETS If well designed, auctioning as the primary allocation method in the third trading phase in the EU ETS has the potential to improve the efficiency and integrity of secondary markets and, hence, extend the EU’s lead in a rapidly developing global carbon market. However, for this to hold a holistic design which integrates auctioning into the secondary market architecture is of paramount importance. Hereafter, we recommend and reason some fundamental design principles to make auctioning an integral part of the overall market functioning.33 Recommendation 1: Auctions should be for homogenous, fully fungible instruments only

•

Auctioning futures would change the role and economics for governments. In selling futures governments would in fact become a new large risk taker in the market who by definition would not actively manage its portfolio. In contrast to spot auctioning where proceeds would be available all along, with futures auctions public budgets would be attained upon maturity of the futures contract. Furthermore, by auctioning futures there would also be the need for governments, and their agents respectively, to pledge and maintain margin collateral with the clearinghouse to manage their short positions. Auctioning futures could also have considerable adverse effects on the competitive structure of secondary markets and institutions. Let us assume that futures are auctioned at only one particular venue and, accordingly, cleared at a certain clearinghouse. Then the public auctioneer would direct a significant share of the markets’ open interest to this clearinghouse. As a result, all secondary market trading activity in futures would be directed to this particular clearinghouse and the associated trading venue. Hence, centralized futures auctioning could negatively impair secondary market competition.

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•

•

Long-term hedging strategies create demand for futures trading well in advance of the third trading period. By definition, supply and demand – i.e. short and long side of the market – in futures markets is not limited. Assuming that the market has confidence in the supply schedule of the underlying emissions allowances, hedgers, speculators and intermediaries should always provide sufficient liquidity to trade a liquid forward curve. Expectedly, secondary futures markets should be able to provide the required liquidity well in advance of the third trading period without the addition of futures auctions. If nothing else, auctioning futures is also seen as a means to mitigate the operational risks and lack of confidence in the timely readiness of registries to issue emission allowances. To remedy this uncertainty, there have been considerations on auctioning alternative forward instruments like non-fungible futures, securitized term contracts or notes guaranteeing future delivery at preset prices. But all such instruments would distract liquidity from the incumbent secondary markets. They would naturally trade at a discount and, thus, lower the proceeds from auctioning.

Recommendation 2: Auctions should be implemented by using the existing secondary market infrastructure and institutions At first glance, setting up a single centralized auctioning platform with a dedicated compliance, collateralization and settlement regime maximizes liquidity in auctions whilst also being cost-efficient. In practice, such a start-from-scratch approach inevitably duplicates existing market infrastructure and networks already in place. Beyond infrastructure costs, market participants would have extra cost to gain connectivity, set up processes, provide collateral and fund settle-

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ment liquidity. Hence, from economic efficiency perspective it is advisable to reuse secondary markets infrastructure to the broadest extent possible in order to minimize and control platform and operations costs. There is competition at all layers in secondary markets. This ensures cost efficiency and continued service, process, and product innovation. In such a set up, it would be at the discretion of market participants and Member States to choose the most efficient venue at which to auction. Imposing and hardwiring a single platform for auctioning top down would obviously not be supportive of competition. The competitive and decentralized bottom up approach taken to build up the secondary market architecture based on the existing infrastructure and institutions seems more appropriate. As regards infrastructures capable of implementing auctions, several institutions qualify. Running and clearing electronic auction markets is one of the core competencies of secondary market infrastructure providers like for example exchanges. Hence, using secondary market venues would also be the approach of choice to minimize implementation risk and cost. The fast and smooth introduction of on-exchange spot and futures auctioning in Germany is a good example. From adoption of the legislation end of May 2009 it took just seven months to select the auctioning venue, build the functionality and getting started beginning of January 2010.34 Recommendation 3: Auctions and secondary markets should have a common regulatory framework The interdependencies between auctioning and secondary markets with regard to market manipulations and abuse have been highlighted above. Therefore, it is recommendable that the new regulation on auctioning seamlessly interacts with existing secondary market regulations and oversight on the institutional and market level.


There is already a comprehensive EU-wide regulatory framework for markets in financial instruments in place to monitor market integrity, transparency, and abuse.35 This includes futures on emission allowances as well as futures on any energy products. Similarly, there is a levelled European playing field in terms of regulation and oversight of market institutions like exchanges. In this respect, efforts are underway to frame similar rules for spot markets. A straight forward approach, for example, would devise the regulation on auctioning on the basis of secondary markets regulations and pre-define eligibility criteria for venues at which auctions are allowed to take place – such as secondary market infrastructure providers. Whilst leaving the choice to pick the best and most efficient venues with the member states and auctions participants, this approach would ensure that auctions are performed under a harmonized regulatory framework and levelled playing field. It would also leverage the existing enforceable legislation and acting oversight bodies of secondary market infrastructure providers such as exchange and clearinghouse activities as well as for any related dealings of intermediaries and customers. Recommendation 4: Access to auctions should be non-discriminatory and cost-efficient EU Commission comprehensively laid out the requirements for a non-discriminatory access to auctions (EC, 2009b). However, there are several trade-offs, mostly related to risk management aspects and practicability, in granting access to auctions to thousands of compliance buyers, financial market players and intermediaries. But a non-discriminatory access must not compromise on market safety and integrity. Secondary market infrastructures such as exchanges, which are subject to a strict compliance and supervisory regime, already provide non-discriminatory access to their infrastructures. Such access is either direct by becoming a member or indirect through inter-

mediaries guaranteeing the market activities of non-members. Comprehensive “know-your-customer” requirements and compliance procedures are established. Risks are shared cost-efficiently between exchanges and trading members as well as between clearinghouses and clearing members. There are strict rules and procedures in place to segregate customer and proprietary business on all levels of the intermediation chain. Finally, exchange users can choose the most suitable and most efficient set-up for participating in auctions and secondary markets – regardless whether they participate in a financial or compliance capacity. Competition for customer business between exchanges as well as between members of exchanges ensures cost efficiency, i.e. keeps access and transaction costs at competitive levels. Recommendation 5: Government proceeds from auctioning should follow secondary market prices Auctioning of emission allowances generates revenues for governments who pursue a natural interest to gain reasonable proceeds. Assuming that auctions are implemented properly and that there are no arbitrage barriers, auction clearance prices should conform to secondary market pricing. Hence, governments can generate a fair revenue stream from auctioning as secondary market prices best reflect the fair value of emission allowances. However, it is of vital importance for EU ETS’ integrity and credibility that governments and auctioneers do not play the market to maximize proceeds. This could be foreclosed with a strictly binding and enforceable auctioning schedule defining the timing, volumes, and frequency of auctions for all Member States. In view of the auctioning volumes to be absorbed by the market and against the objective to average and balance proceeds, an auctioning schedule with a high frequency of auctions seems recommendable.

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FINAL REMARKS Efficient functioning of any financial and commodity market is of substantive importance since the continuous and transparent price discovery provided in secondary markets is the most crucial element in making long-term investment decisions and in achieving the most efficient allocation of resources. Even more, protecting market integrity and confidence is of particular importance for politically founded cap-and-trade markets like the EU ETS. The reality or suspicion of an increased vulnerability to market manipulation and excessive speculation would not just undermine public support. The high uncertainty resulting form arbitrarily biased price signals would spill over to adjacent energy markets as outlined in the introductory remarks and subsequent considerations of this contribution. Departing from the foundations and economics of cap-and-trade markets, we have confirmed in our contribution the general conjecture that the EU ETS is working well. But we also illustrated the variability and frictions in pricing relations between spot and futures as well as between emissions and electricity markets. This led to the conclusion that efficiency and integrity of the secondary markets is particularly susceptible to institutional uncertainty and frictions in supply and demand constraints. The sheer magnitude of the auctioning volumes envisaged for the third trading period of the EU ETS makes efficient auction design for the third compliance period a unique challenge. A wrongly designed auctioning scheme could result in arbitrary liquidity shocks, excessive volatilities and distortions to secondary markets functioning. It could undermine market integrity and confidence the EU ETS has built its leading global role on so far. Any decision on the design of the auction mechanism itself, on the contracts and instruments to be auctioned, on eligible access routes to the auctions and finally on the post-auctioning clearing and settlement will inevitably have an impact

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on the overall functioning of EU ETS markets and institutions. We have demonstrated the interdependencies between auctions and secondary markets and have provided a rationale for a frictionless integration of auctioning into the overall market functioning by using the existing secondary market infrastructures and institutions. The reasoning behind is based on the strong interaction of emissions market with the adjacent energy markets, with emissions market growing into a key interlinking market. With auctions being an integral part of the secondary markets, the EU ETS’ integrity and trustworthiness would be preserved. Our concluding postulate to make auctions an integral part of the secondary market architecture does neither exclude nor constitute any of the design options from coordinated decentralized to fully centralized implementation currently in discussion at the political stage. There are various ways to picture hybrid and coordinated auctions in today’s secondary market infrastructure. But it is of capital importance to protect the competitive and innovative framework within which secondary market infrastructure providers and institutions can deliver an efficient and reliable market place.

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Soderholm, P. (2000). Fuel flexibility in the West European power sector. Resources Policy, 26, 157–170. doi:10.1016/S0301-4207(00)00025-8 Springer, U. (2003). The market for tradable GHG permits under the Kyoto Protocol: A survey of model studies. Energy Economics, 25, 527–551. doi:10.1016/S0140-9883(02)00103-2 Springer, U., & Varilek, M. (2004). Estimating the price of tradable permits for greenhouse gas emissions in 2008-2012. Energy Policy, 3, 611–621. doi:10.1016/S0301-4215(02)00313-0 Svendsen, G. T., & Christensen, J. L. (1999). The US SO2 auction: Analysis and generalization. Energy Economics, 21, 403–416. doi:10.1016/ S0140-9883(99)00004-3

Letter of the European Commission to the United Nations Framework Convention on Climate Change (UNFCC) dated January 28, 2010. Auctioning in the third trading period will be at least 50% of the annual cap. Assuming daily auctions, markets would be flooded with roughly 4 million t per trading day, i.e. 20% to 40% of current total daily trading volumes in secondary markets. Article 10(1) of the revised ETS Directive – see EC (2009a) – defines auctioning as the basis principle for allocation. Article 10(4) requires the EU Commission to adopt a regulation on auctioning by June 30, 2010. Following from Article 249 of the EU Treaty, the regulation will be binding in its entirety and will be directly applicable (i.e. its application cannot be contingent on any national discretion). Definitions of clean-dark-spread and cleanspark-spread follow widely used market

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usances. For a methodology to calculate the spreads see for example at Caisse des Dépôts (http://www.caissedesdepots.fr/fileadmin/ PDF/finance_carbone/document_methodologie_tendances_carbone_en_v4.pdf). The fuel-switching price is the emissions allowance price that is needed to make gas-powered plants favored over coal-fired plants. Kahnen (2006) suggests that the market must be short of allowances in order that fuel-switching prices drive the long-term emissions allowance price level. For an historical overview of the electricity liberalization process and a thorough description of the deregulated electricity market structure see, for example, Mork (2001). There is empirical evidence of futures markets’ superiority in terms of price discovery compared to underlying cash markets. Futures are traded at the margin with by far lower transaction and capital costs. This results in higher liquidity and, hence, smaller reaction rates to process new information. See also early contributions on this by Garbade and Silber (1996). There is, for example, some early work prior to the introduction of the EU ETS on this matter by Soderholm (2000) and Estrada and Fugleberg (1999). Mansanet-Bataller et al. (2007) look at the interplay between emissions, energy and weather. More recently, Mansanet-Bataller and Soriano (2009) focus on the volatility transmission between emissions and energy markets, namely between emissions, gas and oil markets. There is also a fund of co-integration analysis between spot and futures as well as across the different trading venues within the EU ETS. See, for example, Daskalakis and Markellos (2008). See, for example, the analysis of effects on risk premiums, price levels and drivers and transmission across markets by Frino et al.

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(2008), Alberola et al. (2007), and Daskalakis and Markellos (2009). The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC), aimed at fighting global warming. The Protocol was initially adopted on December 11, 1997, in Kyoto, Japan. It entered into force on February 16, 2005. The Protocol allows for three flexible mechanisms, i.e. emissions trading, the clean development mechanism (CDM) and joint implementation (JI), to allow industrialized countries (so-called Annex I countries) to meet their emission limitations by purchasing reductions credits from elsewhere, through financial exchanges, projects that reduce emissions in non-Annex I countries, from other Annex I countries, or from Annex I countries with excess allowances. The EU ETS was launched on January 1, 2005, as the primary mechanism to achieve the so-called “bubble” target, i.e. the target of an EU wide reduction of 8% in the commitment phase 2008 to 2012. EU internal burden sharing arrangements reflect a much wider range of targets from a 28% reduction in Luxembourg to a 27% increase in Portugal. The terms primary market and secondary market are used in accordance to their meaning in securities markets. The primary market is that part of a securities market that deals with the issuance and initial placement of securities or financial contracts which are, henceforth, tradable in secondary markets. Although most capital market legislations do not treat them as such, emission allowances are almost perfectly fungible securities with efficient transfer of title mechanisms. See for example Springer (2003) for a comprehensive survey on this subject. This paper gathers results from 25 models of the market for tradable greenhouse gases emission permits. See also for example Springer and Varileck (2004) who add specific design


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factors such as the number of sectors in the economy that are not subject to the scheme or the inter-period transfer of allowances. See www.pointcarbon.com. Further sources would be, for example, www.enervia.com and www.carbonriskmanagement.com. With regard to replacing free allocation with competitive auctioning, this competitive exposure of industries other than electricity also provides reason for the EU Commission’s proposal for the third phase of the EU ETS suggesting a gradual phasing of auctioning for the industry sectors other than electricity from 2013 to 2020. To a certain extent, the EU Commission and Member States would have the ability to recycle some of auctioning proceeds back to the industry sectors to compensate for the additional cost burden the the latter are unable to pass on. But it is unlikely and politically difficult to implement total revenue neutrality. In regulated electricity markets, as still found in some EU Member States like for example in Poland and Hungary, electricity is usually priced on an average cost basis. Electricity producers may only recoup out of pocket costs plus a regulated return so that total costs are covered and there is a return on investments in the generation plants. In fact, similar pricing patterns could be found in electricity markets characterized by long term electricity purchase agreements with upstream supply businesses backed by long term fuel supply contracts. However, there is a strong drive for greater liberalization in European energy markets. Varian (2003), for example, emphasizes the point that in economics, the concept of opportunity cost must be taken into account whenever a resource can be used in alternative ways. See also Grafton and Devlin (1996) and Nentjes et al. (1995). For example, according to IPA (2005) electricity producers in the UK are estimated to

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have made £ 800 million in windfall profits within the initial phases. Please note that there is indeed the alternative for governments to directly sell emission allowances into the market on a discretionary basis. This approach has been taken in Germany in 2008 and 2009 of the second trading phase of the EU ETS. 10% of the total amount of allowances was sold by stateowned bank Kreditanstalt fuer Wiederaufbau (KfW). The remaining 90% were subject to free allocations. In principle, this approach proved to be reasonable when volumes to sell are small compared to daily trading volumes. However, Germany moved from direct selling to auctioning for the remaining years 2010 and 2011 of the second trading phase. See also Van Damme (2002) for a discussion of the differing designs and results of European UMTS auctioning. According to EU Commission consultation paper “Technical Aspects of EU Emission Allowances Auctions”, August 2009, the 2003/87/EC directive covers around 11 000 – 11 500 installations across the EU from the most intensive CO2 emitter sectors; specifically combustion plants, oil refineries, coke ovens, iron and steel plants, and factories producing cement, glass, lime, brick, ceramics, pulp and paper. See also http:// ec.europa.eu/environment/climat/emission/ citl_en.htm. To supervise the commitment of the objectives, the European Community has established that each Member State must submit a report of the verified emissions in a given year by March 31 of the following year. For example, the Member States must submit a report of verified emissions in 2009 by March 31, 2010. In that report, compliance of emissions of each company covered by the directive must be specified. Additionally, these companies must surrender the allow-

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ances of a given year not later than April 30 of the following year. That is to say, April 30, 2010 is the deadline to surrender the allowances for 2009. Article 16 (4) of the 2003/87/EC Directive says that the “payment of the excess emissions penalty will not release the company from the obligation to surrender an amount of allowances equal to those excess emissions when surrendering allowances in relation to the following calendar year”. See EC (2003). For additional information about these markets see the official web pages: CLIMEX (www.climex.com), EEX (www.eex.de), ECX/ICE (www.ecx.eu and www.theice. com), EXAA (www.exaa.at/cms), NordPool (www.nordpool.no), BlueNext (www.bluenext.fr) and SENDECO2 (www.sendeco2. com). Clearing is the process of calculating the mutual obligations of market participants and maintaining position accounts, usually on a net basis, up to the final exchange of the underlying and monies to fulfill such obligations. A clearinghouse with a Central Counterparty (CCP) function becomes the buyer to every seller and seller to every buyer of a specified set of contracts eligible for clearing. In so doing, a CCP mitigates counterparty default risks and, therefore, allows the segregation of trading and credit relationships between counterparties. In short, a CCP is a prerequisite to attract liquidity from a diversified trading community. Source of time series: www.ecx.eu/MarketData Source of time series: www.ecx.eu/MarketData Source of time series: www.ecx.eu/MarketData. Source of time series: www.ecx.eu/MarketData and www.eex.com/downloads.

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Source of futures time series: www.ecx.eu/ Market-Data. Source of spot contract time series: www.bluenext.fr/statistics. For example, Sijm et al. (2006) found differing pass-though rates for Germany ranging from 39 to 73 percent in the period from January to July 2005 and from 60 to 80 percent in the remaining of 2005. Source of time series: www.ecx.eu/MarketData and www.eex.com/downloads. For a more comprehensive discussion of the susceptibility of futures markets to market manipulation see, for example, Easterbrook (1986). In our considerations we follow Article 10(4) the revised ETS Directive in EC (2009) which demands “… a regulation on timing, administration and other aspects of auctioning to ensure that it is conducted in an open, transparent, harmonized and non-discriminatory manner. To this end, the process should be predictable, particularly regarding the timing and sequencing of auctions and the estimated volumes of allowances to be made available”. In January 2010, Germany auctioned a total of 3.48 million t at the European Energy Exchange (EEX) resulting in proceeds of € 45.4 million. The German government, via state-owned bank KfW, auctions 300,000 spot allowances every Tuesday and 570,000 allowances for December 2010 delivery every Wednesday. Germany’s national allocation plan calls for the sale of 40 million t a year already throughout the second trading period 2008-2012. Refer to www.dehst. de for the periodic reporting on Germany’s auctioning regime. See also websites of the involved exchanges at www.eex.com and at www.eurexchange.com. Refer, for example, to the Market in Financial Instruments Directive (MiFID) and the Market Abuse Directive (MAD) and the respective national implementations.

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Chapter 17

A Pragmatic Profile Approach to Evaluating Environmental Sustainability Investment Decisions Frank Lefley University of London, UK Joseph Sarkis Clark University, USA

ABSTRACT This chapter contends that environmental sustainability is a subject of great contemporary importance, but due to biases associated with traditional project appraisal approaches, projects that have strong environmental issues may be neglected. The chapter then presents a modified version of the pragmatic financial appraisal profile model by including an environmental assessment in the form of the ‘environmental score index.’ An illustrative case study is used to outline the important aspects of this new approach. The chapter concludes that this approach will help to fill a gap in the environmental investment literature, where there is a paucity of comprehensive, structured, and transparent methodologies that can prove acceptable to management decision-makers from a variety of functions and viewpoints.

INTRODUCTION Due to the increase of pressures by various stakeholders on organisations and industry to be more proactive with regard to environmental sustainDOI: 10.4018/978-1-60960-531-5.ch017

ability in their processes, products and practices, environmentally influential capital investments have started to gain significant attention in the literature (Zhu and Sarkis, 2007). The importance of environmental sustainability has been raised in the literature. Sarmento et al., (2005) found that 92% of Portuguese com-


A Pragmatic Profile Approach to Evaluating Environmental Sustainability Investment Decisions

panies made “environmental investment because of the negative impacts of probable ecological accidents”. They also found that a large part of this investment was in tangible capital assets. If, for example, we look at the water industry, agricultural emissions in parts of France have increased in recent times to become a serious threat to water quality (Ekins, 2003). However, traditional appraisal models are inappropriate in such a uniquely regulated industry (Tebbutt, et al., 2003). It is acknowledged that a first step in developing a proactive environmental management program has been to identify the myriad of subtle ways environmental issues impact company cost and revenue streams (White, 1996). The limitations existing with various investment appraisal approaches when it comes to environmental issues, including the need to incorporate strategic considerations into corporate decision-making, planning and control processes, has long been recognised by environmental accounting researchers (Burritt, 2004; Burritt and Saka, 2006). The mainstream academic literature on investment appraisal appears to focus on traditional financial evaluation techniques and tools with little recognition of environmental issues as a factor in the decision process of organisations (Ross and Wood, 2008). There is empirical evidence to show that environmental benefits accrue over a much longer time-horizon than typical investments in organisational projects (Regnier and Tovey, 2007), making their inclusion into investment appraisal and justification even more difficult. In addition to long time planning horizons, there are issues with the various costs and benefits that are associated with green decisions and factors. The United States’ Environmental Protection Agency’s (USEPA) well known cost categorisations (USEPA, 1995) include conventional, hidden, contingent, relationship/image, and societal costs, which range, respectively, from easier to measure to most difficult to measure categories. Thus, there will also be a mixture of relatively tangible traditional costs

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to less tangible and non-traditional cost categories. It is difficult to integrate these characteristics of environmental costs into traditional capital investment appraisal tools. Thus, there is a need for tools that can effectively help organisations make decisions concerning capital projects that include environmentally sustainability dimensions. Organisations need to make a business case for such projects, irrespective of whether they are initiated through regulatory or competitive pressures. One solution is the adoption of the financial appraisal profile approach.

Introducing an Environmental Aspect to the Financial Appraisal Profile Model The FAP model (Lefley and Ryan 2005, Lefley and Sarkis 2007, Lefley 2008a, Lefley and Sarkis 2009) was designed as a three-dimensional (financial, project specific risk, and strategic) model for the appraisal of capital investments. In this case study, we add a fourth dimension, focusing specifically on environmental sustainability issues. Introducing this fourth environmentally oriented dimension will enhance the evaluation, and therefore make for better decision-making of those projects that have significant environmental implications. Such environmental factors being, in the main, ignored by conventional financial appraisal models because of the difficulty, some would argue impossibility, in valuing them in financial terms. We then present a case study that offers some insights into the application of the FAP model. Finally, we summarise the chapter, identifying various issues that may arise with the technique with managerial implications clearly defined.

Evaluating Capital Projects Numerous methods/models have been recommended for the evaluation of capital projects. However, the strategic evaluation and justifica-


tion of many projects go beyond standard return on investment and other short-term financial evaluations. The more complete evaluation of some projects requires the incorporation and consideration of risk, strategic, operational, economic, and environmental factors. In particular, a normative investment appraisal model has been developed which has been called the Financial Appraisal Profile (FAP) model. This model looks at a capital investment project from a financial, risk, and strategic viewpoint. While the FAP model includes some of the more traditional approaches to investment appraisal, it also includes some new techniques and modifies others to create a model that embraces a wider profile of an investment opportunity. The model does not attempt to combine financial and non-financial data into single cashflow figures, a stance supported by Tebbutt et al., (2003). It is a pragmatic attempt to formalise what is often practised in industry and commerce, where the single measures of NPV and IRR are supplemented by subjective claims of non-financial costs and benefits. The FAP model adopts its own structured protocol, for, as some academics would argue, a number of management scholars believe that the process used to make strategic decisions affects the quality of those decisions (see, for example, Fredrickson, 1985). Most current models used for the appraisal and evaluation of strategic projects lack this overall structure to aid organisations in the process of evaluation. Here we look at introducing a fourth dimension to the FAP model to focus specifically on environmental sustainability issues. Other models, such as the Balanced Scorecard (Kaplan and Norton 1996), take on a wider perspective to performance measurement than just financial measurement, and a multi-dimensional performance measure, linking them to business strategy. However, they do not produce the analytical data to the same degree as the FAP model. Tebbutt, et al., (2003) have already pointed out some of the deficiencies of the Balanced Scorecard

approach when applied to capital project appraisals. However, the fact that the Balance Scorecard highlights the importance of other, non-financial measures, and provides a ‘judgmental/subjective’ framework for linking them to business strategy is of particular relevance to establishing support for the FAP model, which takes on both a multi-dimensional and multi-attribute approach. The FAP model differs from all other appraisal models in it unique approach to the involvement of general management and the protocol followed in determining the respective ‘values’ on which the investment is evaluated.

Environmental Issues Organisations have been facing environmental pressures from a variety of stakeholders including government regulators, communities, customers, and employees (Shropshire and Hillman, 2007; Zhu and Sarkis, 2007). Competitors may also serve as stakeholders within a given industry, putting pressures on organisations to react in environmentally sustainable ways (Spence, 2007). Responding to these greening pressures requires both operational and strategic integration of the various environmental factors to the project and investment appraisal level by organisational decision-makers (McDermott, et al, 2002). Ecological modernisation theory has posited that with appropriate technology development and integration organisations can provide substantial positive gains on both environmental and economic benefits at both national and organisational levels (Burnett, et al., 2007; Revell, 2007). Thus, the selection of programs, projects, and technologies under the purview of capital appraisal and investment is critical for organisations to make gains on both environmental and economic dimensions. Incorporating environmental dimensions into these decision frameworks is a critical step in this process. The integration of environmental factors, costs, and dimensions is not a trivial task. One

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Table 1. Environmental issues Biodegradable / compostable (%) Commitment to periodical environmental auditing Contains no ozone depleting substances Emissions and Waste (per unit of product) Energy efficiency label Environmentally-responsible packaging Global application of environmental standards Green Products Hazardous air emissions Hazardous waste Involvement in Superfund site International Organization of Standards (ISO) 14000 certification Landfill – tons of waste per year Longer shelf life than industry standard Number of hours of training on environment per employee

of the most critical aspects of this integration is the appropriate valuation and integration of environmental benefits and costs into auditing, control, performance measurement, and capital investment decisions (Sarkis, 2001; Sarkis, et al., 2006). Environmental measures and factors can be delineated through a number of categorisations and may be based on level of difficulty for valuation or tangibility (USEPA, 1995; Curkovic and Sroufe, 2007); risk management categorisations (Sarkis, 2006); environmental media categorisations (e.g. solid waste, air emissions, water emissions, energy usage) (Jasch, 2003); or by level of decision-making, strategic, tactical and operational (Hervani et al., 2005; Presley et al., 2007). This variety in categorisation of costs and benefits adds to the complexities of integrating greening dimensions into financial investment appraisal approaches. Instead of a specific categorisation of environmental cost and benefit metrics, we provide a general listing of these items in Table 1. This table of metrics provides a comprehensive, but not necessarily exhaustive, environmental factor listing of what organisations may consider when evaluating the environmental dimensions of projects.

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Number of Spills On Environmental Protection Agency (EPA) 17 hazardous chemicals list Ozone depleting Chemicals used Packaging residuals per unit of product Participation in voluntary EPA programs Pre/post consumer recyclable content (%) Public disclosure of environmental record Received any EPA/(RCRA non-compliance fines Resources and Energy (per unit of product) Second tier supplier environmental evaluation Secondary market for waste generated Solid waste Take-back or reverse logistics program Third party certification (eco labeling) Total energy used Toxic pollution

Project Environmental Benefits We extend the basic FAP model to include a forth dimension by introducing an environmental ‘score’ index, based on the concept of the strategic index. This extension enables us to refine the evaluation for projects, which have a significant environmental perspective. Corporate management first identify those environmental factors that are of special significance to them with various levels of ‘importance’ (weights) (determined by corporate management with the assistance of a team of environmental experts/consultants) assigned to these factors. The appraisal team will then determine the ‘score’ values for each factor with respect to the project under review, in much the same way as their involvement under the strategic index. By applying a weight to the ‘scores’, we are able to produce a total environmental score value for each project. This sub-index, which we have called the environmental score index, then becomes part of the overall profile of the project.

The Final Stage in the FAP Process When the net present value profile, project risk profile, strategic index, and the environmental score index have been determined, the FAP is


Table 2. The financial appraisal profile (FAP) of the case study Project Basic data

Capital cost of the project

(i)

(ii)

$292,000

$1,673,000

Cost of capital

8%

8%

7 years

14 years

NPV

$724,000

$1,938,000

DPB

2.94 years

6.21 years

DPBI

3.5

2.2

MGR

19.5%

5.65%

Estimated Life of Project Financial: NPV Profile

AVs - Classification Project specific risk: Project Risk Profile

Medium

low

RAI -3.6 Dept. B

RAI -3.1 Dept. A

Extreme ‘risk impact’ area and value:

Department A: 11.2 (D. of V. 8.4%) Risk element 2.

Department B: 12.3 (D. of V. 10.1%) Risk element 1.

Highest Degree of Variance

Probability: Risk element 6. Dept. E. 14.2%

Impact: Risk element 5. Dept. E. 13.7%

Risk Area Index

Strategic benefits: Strategic Index Environmental Factors: ES Index (maximum possible score 63)

compiled, which highlights the financial, risk, strategic, and environmental characteristics of a proposed project. It is then left to the investment appraisal team to make their recommendations to corporate management. A case study based on two mutually exclusive projects, with important environmental implications, is now given. The projects under consideration are aimed at increasing production capacity in an industry that is known for its potentially high level of environmental pollution. While all known costs and benefits are included in the DCF calculations, the company wishes to ‘quantify’ the environmental impact of the two projects. The final analysis from this case study summarises the overall results of the FAP process and is shown in Table 2.

6.3

5.8

48.8 (77%)

39.3 (62%)

The net present value profiles of the two projects show (see Table 3.): Project (i) has a capital cost of $292,000 with an estimated life of seven years. It has a net present value of $724,000, with a short payback period marginally less than three years. The project repays its original cost three and a half times, has a very high marginal growth rate of 19.5%, and a medium classification for the abandonment value.

Table 3. NPV Profile of the two projects Project (i)

Project (ii)

Capital cost of project

$292,000

$1,673,000

Illustrative Case Study Summary

Project estimated life

7 years

14 years

NPV

$724,000

$1,938,000

So what does this profile tell us? It gives us a profile of four main investment criteria, (1) financial, (2) project specific risk, (3) strategic, and (4) environmental.

DPB

2.94 years

6.21 years

DPBI

3.5

2.2

MGR

19.5%

5.65%

AVs

medium

low

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Table 4. The project risk profile (PRP) Risk areas (Departments/areas of responsibility)

Project (i)

Project (ii) Risk value/profile

Department A

-2.3

-3.1

Department B

-3.6

-2.0

Department C

-0.5

-0.4

Department D

-0.2

-0.7

Department E

-0.9

-0.8

RAI -3.6 Dept. B

RAI -3.1 Dept. A

Extreme ‘risk impact’ area and value:

Department A: 11.2 (D. of V. 8.4%) Risk element 2.

Department B: 12.3 (D. of V. 10.1%) Risk element 1.

Highest Degree of Variance:

Probability: Risk element 6. Dept. E. 14.2%

Impact: Risk element 5. Dept. E. 13.7%

Project Risk Area Index The project RAI is based on the highest risk value shown by the risk profile.

Project (ii) has a capital cost of $1,673,000 with an estimated life of fourteen years. It has a higher net present value of $1,938.000, but a longer payback period of over six years. The project repays only just above twice its original cost, has a low marginal growth rate of 5.65%, and a low classification for the abandonment value. Although project (ii) shows a higher NPV than project (i), and under the NPV rule should therefore be accepted, all the other financial indicators are significantly in favour of project (i).

Project Specific Risk With respect to the assessment of a project’s specific risk, the company has established five risk management areas of responsibility (Departments A-E) and has determined a corporate risk threshold rating of seven. The company also accepts the notion of applying a weighting to the risk ‘impact’ values, to take into account the greater ‘importance’ of higher impact values (Lefley 2008b). With the aid of external consultants, it has therefore arrived at a weighting formula to be used to calculate the appropriate disutility

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impact values. It is assumed that there are seven risk elements (project specific risks). The degree of variance is the coefficient of variation in the suggested values. The coefficient of variation is a relative measure of dispersion from the mean and is equal to the ratio of the standard deviation to the mean. After applying a disutility factor to the suggested impact value, a disutility impact value is arrived at. Based on the above the project risk profile is prepared. The project risk profiles of the two projects show (see Table 4.): Project (i). The highest risk is in department B at –3.6 (which, on a scale of zero to minus 10, is relatively low). The extreme risk impact is in department A with respect of risk element 2 at 11.2 (on a scale of 1 to 100) with a degree of variance in the appraisal team members’ individual values of 8.4%. The profile also identifies that the highest degree of variance in the values put forward by the appraisal team members was with respect to risk element 6 in department E at 14.2% - this indicates a degree of uncertainty with respect to the probability of this particular risk occurring.


Table 5. Determination of the strategic index (SI): Project (i) Corporate Ranking (a)

Project strategic score value (b)

(a) x (b)

Strategic benefit 1.

10

8.4

84.0


10

5.2

52.0


9

6.8

61.2


8

7.9

63.2


9

5.6

50.4


10

5.2

52.0


6

4.3

25.8

Totals

62

The strategic index [(a) x (b)]/a = 388.6/62

388.6 6.3

The corporate ranking is the weight placed on a particular strategic benefit by senior corporate management to reflect its corporate importance in relation to other strategic benefits. Each individual benefit is also given a ‘project strategic score value’, representing the benefit level within a given project. Both the ranking and the strategic score values are on a scale of 0 to 10. The SI is the weighted average of the CRs and PSSVs.

Project (ii). The highest risk is in department A at –3.1. The extreme risk impact is in department A with respect of risk element 1 at 12.3, with a degree of variance in the appraisal team members’ individual values of 10.1%. The profile also identifies that the highest degree of variance in the values put forward by the appraisal team members was with respect to risk element 5 in department E at 13.7%. Overall, project (ii) shows a lower risk profile than project (i), but the difference is not significant.

Strategic Issues The strategic importance of the project is measured by the strategic index. Key strategic benefits looked for in all capital projects are identified by corporate management and a corporate ranking (CR) of ‘10’ is given to the most important benefit(s). All other key strategic benefits are than assessed against the CR of the ‘first’ key strategic benefit by determining how less important they are to the organisation in relation to that benefit.

The benefits are then assessed against each other, in order to determine a consistency of ranking - in other words, to make sure that the laws of transitivity have not been violated. The figures in Tables 5 and 6 are based on the agreed values determined by each departmental manager with respect to the strategic importance of the seven strategic benefits determined by corporate management. The corporate ranking is applied to arrive at a total strategic index. The strategic indices of the two projects show (see Tables 5 and 6): The strategic importance of each project is highlighted by the strategic index of 6.3 (measured on a scale of zero to 10) for project (i), and 5.8 for project (ii). This shows that project (i) has a measured higher level of strategic importance than project (ii).

Environmental Issues Finally, the project is appraised on its environmental factors in a similar manner to the SI procedure. Key environmental factors are identified (in this case seven factors) and the five appraisal team

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Table 6. Determination of the strategic index (SI): Project (ii) Strategic benefits:

Corporate Ranking (a)

Project strategic score value (b)


10

7.8

(a) x (b) 78.0


10

5.1

51.0


9

6.5

58.5


8

7.1

56.8


9

5.1

45.9


10

5.5

55.0


6

2.9

17.4

Totals

62

362.6

The strategic index 362.6/62

5.8

Table 7. Calculation of environmental score values: Project (i) Key Environmental Factors:

Score values determined by appraisal management team Member (i)

Member (ii)

Member (iii)

Member (iv)

Member (v)

Average Score

1. Landfill (tons of waste per year)

5.8

4.1

4.6

3.8

5.1

4.7

2. Emissions and Waste (per unit of product)

7.8

7.7

8.2

8.1

8.7

8.1

3. Biodegradable / compostable (%)

8.1

8.4

8.0

8.7

8.7

8.4

4. Hazardous air emissions

8.0

8.0

7.5

7.9

7.7

7.8

5. Hazardous waste

9.1

7.7

8.9

8.5

8.2

8.5

6. Toxic pollution

9.0

8.0

9.1

9.4

8.8

8.9

7. Total energy used

7.2

7.1

7.2

7.8

7.3

7.3

members agree their individual score values for each factor, from which an average score value is calculated (see Tables 7 and 8). A weighting is then applied to the average score values to arrive at an environmental score index for each project. This weighting, determined by corporate management, is required to reflect the level of ‘importance’ of the individual environmental factors – not all factors will have the same level of importance to the organisation. The index reflects positive aspects i.e. reductions in environmentally polluting factors. So the higher the index the more favourable the outcome. The environmental score indices of the two projects show (see Tables 9 and 10):

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The environmental importance of each project is highlighted by the environmental score index of 48.8 (77%) for project (i), and 39.3 (62%) for project (ii). This shows that project (i) has a significantly higher level of environmental importance than project (ii). Given these summary results, management must now decide which of the two alternatives is the most attractive based on their policies, strategies, financial standing, operational requirements and goals. Overall, adopting the NPV rule only, project (ii) would be accepted, but based on the other criteria perhaps project (i) is the one to be favoured. The FAP model provides a comprehensive overview of the two investment opportunities.


Table 8. Calculation of environmental score values: Project (ii) Key Environmental Factors:


Score values determined by appraisal management team Member (i)

Member (ii)

Member (iii)

Member (iv)

Member (v)

Average Score

3.9

3.6

4.2

4.7

4.9

4.3


7.7

7.0

8.0

8.2

7.8

7.7


8.2

7.8

7.7

8.4

8.1

8.0


7.1

7.0

7.0

6.9

6.8

7.0

5. Hazardous waste

6.7

7.2

7.2

6.8

6.9

7.0

6. Toxic pollution

6.8

6.1

5.7

5.9

6.0

6.1


3.3

3.0

3.2

4.0

3.9

3.5

Table 9. The Environmental Score (ES) Index: Project (i) Environmental key factors

Weighting (a)

Average Agreed Scores 0 to 10 (b)

(a) x (b)


0.8

4.7

3.8


0.8

8.1

6.5


0.8

8.4

6.7


1.0

7.8

7.8

5. Hazardous waste

1.0

8.5

8.5

6. Toxic pollution

1.0

8.9

8.9


0.9

7.3

6.6

The ES Index

48.8 (77%)

The weighting in column (a) represents the senior corporate management’s view of the importance of each environmental factor. The agreed score values in column (b) are specific to the project under review (see Table 7). The ES Index represents the total of the weighted score values with a maximum possibility (based on the agreed weights in this example) of 63.

Table 10. The Environmental Score (ES) Index: Project (ii) Key Environmental Factors:

Weighting (a)

Average Agreed Scores 0 to 10 (b)

(a) x (b)


0.8

4.3

3.4


0.8

7.7

6.2


0.8

8.0

6.4


1.0

7.0

7.0

5. Hazardous waste

1.0

7.0

7.0

6. Toxic pollution

1.0

6.1

6.1


0.9

3.5 The ES Index

3.2 39.3 (62%)

See Table 8, for the average agreed scores used in column (b).

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Clearly, management must now use their judgement, which cannot be substituted by any model, on which project to select. Some would argue that selecting project (i) adopts a short-term approach, while others would argue that adopting project (ii) could deny the company the opportunity to invest in newer replacement technologies earlier, i.e. in seven years rather than fourteen years. If the company could invest the difference between the capital cost of the two project (i.e. $1,381,000) in a mutually exclusive project to that of project (ii) and produce a NPV in excess of $1,211,000, (at this figure giving a DPBI of less than two) then this would also favour the selection of project (i).

CONCLUSION Environmental sustainability is a subject of great contemporary importance. We have highlighted relevant environmental characteristics of some capital projects and applied the financial appraisal profile approach to their evaluation, which is supported by a case study example. We have described and shown how these factors can be integrated into a comprehensive evaluation of projects with significant environmental implications. We believe that this method helps fill a gap in the environmental investment literature where there is a paucity of comprehensive, structured, and transparent methodologies that can prove acceptable to management decision-makers from a variety of functions and viewpoints. However, we need to reiterate at this point that the FAP model is an aid to management decision-making and not a substitute. We do not attempt to combine financial and non-financial factors into a single cashflow figure and accept that ranking of multiple criteria is not a straightforward process. For these reasons, we show the results of our analysis as a profile and leave management to make the final decision.

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Section 4

Green Manufacturing, Logistics and SCM

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Chapter 18

Green Logistics:

Global Practices and their Implementation in Emerging Markets Marcus Thiell Universidad de los Andes, Colombia Juan Pablo Soto Zuluaga Universidad de los Andes, Colombia Juan Pablo Madiedo Montañez Universidad de los Andes, Colombia Bart van Hoof Universidad de los Andes, Colombia

ABSTRACT Global warming, climatic disasters like Hurricane Katrina, and the depletion of the ozone layer illustrate the negative impact of economic growth on ecological systems and the societies that function within them. As a result, customers and many governments around the world are developing a more conscious and respectful attitude toward the environment, propelling environmental concerns to the forefront of many companies’ competitive strategies. Consequently, the implementation of green practices into logistics systems is gaining worldwide importance. Green logistics practices within companies, once considered proactive measures (Wu & Dunn 1995), now influence entire value chains, and their presence has become a requirement for doing business. What are the current global practices of choice, and what challenges do companies face in applying them in emerging market economies? This chapter presents a global overview of green logistics practices at various management levels and the inherent challenges of their implementation in emerging markets. It begins by clarifying the terminology and describing its scope and characteristics, and it continues with an analysis of the impact of green logistics on the creation of economic and social value. DOI: 10.4018/978-1-60960-531-5.ch018


Green Logistics

INTRODUCTION: BASICS OF GREEN LOGISTICS The negative impact of business activities on the ecosystem (e.g. global warming and climatic disasters) gave rise to the formulation of various approaches for achieving sustainable methods of development. The Brundtland Commission defined sustainable development as “a type of development that satisfies the current needs without reducing the availability and quality of resources to allow future generations of people to satisfy their needs (WCED 1987)”. In broad terms, the goal of sustainable development is to address growing concerns about environmental issues while simultaneously responding to socioeconomic imperatives. Companies around the world are feeling pressure to implement green practices into their value-creation systems. This pressure emanates from growing environmental awareness on the part of consumers in many countries, as well as increasing prices for raw materials and energy, environmental legislation, and influence exerted by dominant actors in the value chain (Fleischmann et al. 1997, Carter & Ellram 1998, Stock 2001, Ferguson & Browne 2001, Voigt & Thiell 2004, Kumar & Malegeant 2006, Seuring & Müller 2008). The solutions that have been proposed and applied to respond to these trends cover entire value chains, from the reduction of raw material consumption and industrial contamination to cutting down on solid domestic residuals at the end-of-life of products and their reintegration into new value creating processes. Logistics activities encompass these processes due to the cross-functional and cross-organizational nature of logistics management (Wu & Dunn 1995). There is widespread acknowledgement that logistics significantly affect the environment, producing the desired service on one hand and an unavoidable negative environmental impact on the other. For example, transportation is a

logistics operation that has substantial impact on the environment. CO2 emissions from vehicles, aircraft and vessels generate atmospheric contamination, often considered one of the main causes of the global warming effect threatening the world today (Berntsen & Fuglestvedt 2008). Thus, green logistics becomes a key component in achieving sustainable management.

Green Logistics: Drivers, Definition, Characteristics and Scope Green logistics consists of all activities related to the eco-efficient management of the forward and reverse flows of products and information between the point of origin and the point of consumption whose purpose is to meet or exceed customer demand. Given this definition, green logistics is not “new” in terms of re-inventing logistics, but it stresses the integration of ecological goals into the target systems of organizations and value chains in order to provide a balanced set of total value to customers (Carter & Rogers 2008). Green logistics is a concept put forward in the mid-80s (Beaman 1999) to characterize logistics systems that employ advanced technology and equipment to minimize environmental damage during operations, while increasing the utilization of resources within the systems (Rogers & Tibben-Lembke 1998, Yanbo & Songxian 2008). Transferring these general characteristics into activities, the scope of green logistics encompasses the following activity groups: •

•

Transportation, e.g.: clean vehicles, reuse of pallets and containers, freight consolidation and load optimization, standardization of trucks’ sizes, reduction of CO2 emissions, and sustainable carrier selection. Warehousing, e.g.: clean material handling equipment, reconditioning and reuse of pallets and containers, process optimization, automation of warehousing systems, minimization of inventories, facility

335

Green Logistics

•

design, on-site recycling, and optimal disposition of products. Value added services, e.g.: pallet and container pooling, tracking and tracing, and using green packaging technologies.

Figure 1. Green Logistics vs. Reverse Logistics vs. Closed-loop Supply Chain Management

In addition to “green logistics,” two other concepts exist also address environmental issues in the context of the management of flows of material and information within and between organizations: reverse logistics and closed-loop supply chain management. •

•

336

Reverse logistics: While traditional logistics seeks to optimize forward distribution within a value chain, environmental considerations have created new business markets for reverse logistics, encompassing “(logistics) activities all the way from used products no longer required by the user to products again usable in a market (Fleischmann et al. 1997)”. Given this definition, reverse logistics not only covers transportation, warehousing, and value added services in the context of redistribution of end-of life products and residuals but also their collection, product inspection, dismantling and separation, reprocessing of secondary materials and products, and distribution into productive processes (Voigt & Thiell 2004, Kumar & Malegeant 2006). Closed-loop supply chain management (CLSCM): The widest scope of environmental concepts affecting logistics systems is CLSCM. CLSCM requires a re-definition of supply chain tasks and a redesign of the chain structure, since closed-loop supply chains add complexity to their management (Rogers & Tibben-Lembke 1998, Beaman 1999, Van Wassenhove & Geyer 2002) by adding actors (e.g. recyclers, landfill operators) and activities (e.g. recycling, product collection). A typical

example of this closed-loop supply chain is common in Europe. The enforcement of environmental legislation by various governments assigns to manufactures the social responsibility for closed-loop flows, including used products, residuals and wastes (Robeson et al. 1992, Fleischmann et al. 2000, Voigt & Thiell 2004). This more comprehensive management framework addresses issues of green product design, used product recycling, waste disposal, and manufacturing-induced pollution alleviation. Figure 1 summarizes the activities of closedloop supply chain management, green and reverse logistics.

Economic and Social Value of Green Logistics The drivers of the green logistics mentioned above highlight the general necessity of integrating environmentally friendly practices into logistics systems. Such practices have yet to gain general acceptance worldwide, however. Possible general factors restraining companies from creating the green logistics systems mentioned in the literature are cost, lack of awareness, coordination and communication, as well as resistance (Carter

Green Logistics

Table 1. Contribution of Green Logistics to the Creation of Economic and Social Value (Based on Kumar & Malegeant 2006) Â€Â€Â€Â€Economic Value

Â€Â€Â€Â€Social Value

• Improved customer satisfaction • Good relations with stakeholders • Green image • Higher delivery reliability through optimized route planning and less truck downtime • Higher productivity through higher motivation of the employees • Reduced liability risk • Reduced taxes • Improved financial performance

• Reduced environmental impact (e.g. CO2-emissions, noise levels) • Better utilization of natural resources (e.g. fuel, packaging) • Reduced social cost (e.g. health problems in the communities) • Creation of jobs

& Jennings 2000, Kumar & Malegeant 2006). Nevertheless, the “value creation” perspective provides important arguments for overcoming these barriers. Studies demonstrate that the creation of green logistics systems has a positive impact on aspects such as customer satisfaction, labor productivity, relations with external stakeholders and financial performance (Kumar & Malegeant 2006), although this impact may vary among companies, industries, and countries. Table 1 shows the contribution of green logistics to the creation of economic and social value, leading to the conclusion that investments in green logistics systems can improve, sustainably, the competitive position of companies. In addition, as value chains involve many actors, the benefits of investing in green logistics systems can multiply from single companies to its business partners and to society as a whole.

GREEN LOGISTICS PRACTICES: STRATEGIC, TACTICAL, AND OPERATIONAL As stated in “Introduction: Basics of Green Logistics,” green logistics is currently a strategic concern for companies, as demonstrated by the increasing number of companies that introduce innovative green practices into their operations

(Makower 2010). Such practices include reorganization of the value chain at several levels, putting in place efficient re-distribution systems to take back products and materials, and developing a broader design culture, i.e. going beyond immediate functionality to take into account the recovery phase (De Britto 2007). Not only in new processes, however, but also in traditional logistics activities (i.e. transportation, warehousing and value added services) green practices are regarded as substantial aspects of the business world. In the literature, green practices adopted by companies reflect four general strategies: to use less (e.g. material or energy), to substitute (e.g. non-toxic for toxic materials), to clean up the outputs (e.g. end-of-pipe technologies), and to turn outputs into inputs (e.g. reuse of pallets) (Russel & Allwood 2007). The following section describes significant practices in green logistics. These practices involve the above-mentioned activity groups: transportation, warehousing and value-added services. Included are company examples for each one of these service groups.

Transportation Transportation is a logistics activity with a high impact on the environment. This is why it is one of the main areas for development of green logistics practices.

337

Green Logistics

Figure 2. Direct Carbon Footprint of Tesco (TESCO 2010)

The most widespread practice in green transportation may well be the reduction of emissions. Management programs to reduce transportationrelated emissions level have become common worldwide, with the carbon footprint used as the primary reference measurement. This measure computes the level of CO2 emissions produced by the manufacturing and transportation process through the entire value chain. An example of a firm employing this practice is Tesco, one of the world’s largest retailers. Tesco presented its suppliers with a plan to include the carbon footprint index in their product labels. Conscious of customers’ increasing environmental awareness, Tesco is attempting to anticipate the current trend and to prepare the entire value chain for the carbon footprint information that customers demand. Tesco realizes that in a few years, the carbon footprint index will be a key determinant of consumer choice in deciding whether to buy or not to buy a product. Figure 2 shows how Tesco conceives its responsibility and how the company measures the carbon footprint. In addition to the carbon footprint, Tesco also establishes specific corporate goals regarding the energy efficiency it hopes to achieve by reducing its energy consumption and by implementing recycling and reduction of packaging waste pro-

338

grams. The idea behind these initiatives is not only to know the level of carbon emissions, but also to make suppliers compete based on reducing their emissions and energy consumption. With this approach, Tesco does not need to restructure the value chain, but only encourage suppliers to introduce and improve their own processes by using these measurements as a strategic objective within their business. The main green practices in transportation are (Carter & Jennings 2000): •

Clean vehicles/fuel efficiency: the concept of clean vehicles focuses on ways to ensure that transportation methods do not leak fluids, i.e. oil, gas, coolant, etc. Maintenance programs are an important way of controlling and reducing contamination emanating from the company. To help fleet managers make appropriate choices when it comes to fuel consumption and minimizing waste from vehicle maintenance, the North Carolina Division of Pollution Prevention and Environmental Assistance (DPPEA) has investigated several new technologies that address aspects such as: use of alternative fuels, fuel cata-

Green Logistics

•

•

lyzers, by-pass filters, recycled wash water and discharge into sanitary sewer systems. Modal choice (rail versus truck): many companies are changing the ways they transport their products. The switch from trucks to trains or their combination (piggyback transport) helps to reduce CO2 emission levels while reducing transportation costs. The environmental efficiency of rail is greater than that of trucking. The American Trucking Association estimates that trucks transport about 70% (10 billion tons) of all U.S. freight annually, yet they use at least three times as much energy as trains per ton carried. Reconditioning and reuse of pallets and containers: the reuse and reconditioning of pallets and containers instead of replacing and discarding them is one of the main ways to reduce waste and protect natural resources. Contamination reduction results from using plastic instead of wood pallets and by introducing a systematic program of evaluation and reconditioning of pallets and containers.

•

•

In addition to these activities, the following may also prove beneficial: •

Freight consolidation: instead of each store receiving products from each supplier, the creation of distribution centers (DC) allows companies to reduce delivery trips. Suppliers transport the products for a group of sales points to the DC, where classification, organization and distribution of products for the different stores takes place. Delivery to the stores requires a small number of trucks. Mercadona, the biggest supermarket chain in Spain, introduced this practice in its operation and by 2010 it had had created several DCs to consolidate its freight operations.

•

Load optimization: this practice refers to the optimization of space within delivery vehicles. One example is IKEA, the Swedish furniture retailer, which integrates this practice into its product design. IKEA operates 39 logistics centers in 16 countries. The company prepares all packaging and products with an eye toward optimal utilization of space during transportation. By using flat packs and transporting goods whenever possible by rail and sea, IKEA achieves its objectives of being cost-effective and environmentally friendly at the same time. Standardization of truck size and palletization: standardization helps companies to plan and optimize their freight. This is a requirement for multimodal transportation and although commonplace in developed economies, it represents one of the main hurdles in emerging markets. Usually in such business environments, logistics operators outsource transportation service to networks of independent truck operators. Adding to the resulting heterogeneity of vehicles is the operating life of the trucks, which often exceeds 40 years. Under such circumstances, it is difficult to standardize an entire fleet. Sustainable carrier selection: when transportation services are outsourced, one way of assuring the greening of this service is to include environmental friendliness and sustainability criteria in the supplier evaluation and selection processes.

Most green logistics activities in transportation generate cost reductions. This is contrary to the traditional perception, in which managers assume a tradeoff between green logistics and operating costs, not considering the complementary relationship of these objectives in the above examples. Table 2 summarizes the practices found in transportation and classifies them within the four

339

Green Logistics

Table 2. Green Transportation Practices and their Classification Â€Â€Â€Â€To use Less

Â€Â€Â€Â€Substitution

Â€Â€Â€Â€Clean-up of Outcomes

Â€Â€Â€Â€Clean Vehicles/Fuel Efficiency

Â€Â€Â€Â€X



Â€Â€Â€Â€Modal Choice


Â€Â€Â€Â€Reconditioning and Reuse of Pallets and Containers


Â€Â€Â€Â€Freight Consolidation


Â€Â€Â€Â€Freight Optimization


Â€Â€Â€Â€ Standardization of Trucks Sizes and Palletization


general strategies: to use less, to substitute, to clean up the outputs, and to turn outputs into inputs.

Â€Â€Â€Â€X Â€Â€Â€Â€X Â€Â€Â€Â€X


•

Warehousing Today’s warehouses often have eco-friendly features such as solar walls, on-site recycling, or heat-reducing power plants that reduce the global impact of their operations. Warehouse management also frequently makes use of specialized tools and technologies such as flow optimization, automatic warehousing systems, automatic guided vehicles, and inventory minimization programs. Barriers to building such facilities and implementing these technologies usually stem from their elevated market costs. Nevertheless, not all of these practices are costly, and some practices considered earlier under transportation are applicable to warehousing. The main green practices found in warehousing are: •

340

Clean material handling equipment/fuel and energy efficiency: forklift trucks frequently handle stock within a warehouse. These vehicles use several types of fuel, from gasoline to diesel or electric power. The use of electric-powered vehicles, for instance, helps reduce emissions and noise levels in the warehouse.

Â€Â€Â€Â€Turn Outputs into Inputs

•

•

Reconditioning and reuse of pallets and containers: as in transportation, the re-use and reconditioning of pallets and containers helps reduce contamination. On the other hand, instead of using wood pallets (the most common worldwide) the use of plastic pallets helps prevent deforestation. Process optimization: avoiding reprocessing, errors and waste is one of the best ways of reducing the impact of warehousing activities on the environment. In this sense, good performance and utilization of equipment contribute to the minimization of process steps and emissions. In warehousing, several technologies improve the flow of operations. Radiofrequency picking, for example, allows companies to minimize the number of movements needed to prepare orders. Automatic warehousing systems (AWS): these systems maximize the use of technology in the warehousing operation. The idea is to optimize flow, timing and organization in such a way that there is minimum waste and error in the process. A good example is COFARES, the logistics operator for the pharmaceutical industry in Spain. COFARES created an AWS that allows it to receive an order and have it ready to for shipment in an average time of seven minutes, nearly error-free. In addition, AWS

Green Logistics

•

•

•

can operate without the need of lighting contributing to the reduction in energy consumption. Minimization of inventories: the essence of warehousing is the maintenance of inventories. An efficient operation can lead companies to reduce the inventories to their minimum required level, reducing at the same time the corresponding operations. In addition, inventories usually hide inefficiencies: Toyota, famous for the introduction of the just-in-time system (JIT), which allows the company to minimize the number of goods in inventory, reduced its errors, waste and inventories, making the system more environmentally friendly. Facility design: another means of greening warehouse operations is related to the building itself. The construction of the facilities is crucial to the level of energy and other resource consumption required in the future. The use of solar walls, natural lighting, warming systems, adequate floors, etc. is important and directly affects the level of energy needed for the operation of the warehouse. In special cases like refrigerated storage, such aspects become even more important. At this type of facility, several aspects must be taken into account in order to make them environmentally friendly: thicker floors, walls and roof; the use of inbound and outbound conveyors with lock gates for pallets instead of doors; the selection of the right compressor and cooler; appropriate choice of components for the refrigeration process; the application of speed control for compressors; advanced lightning methods; adequate pipe dimension and insulation; defrosting using hot gas and computerized control systems all help achieve this goal (Duiven & Binard 2002). On-site recycling: this is not just part of warehousing, but often extends through-

•

out the entire company. The main idea is to promote recycling of products, materials and packaging within the warehouse. Training of workers and the commitment of the company’s management are required conditions to succeed in this practice. Product disposition: within warehousing, it is common to find obsolete products and materials retained for long periods. One green logistics practice is to find alternative uses for stock that is no longer useful for its primary purpose. These products are re-used as materials for other type of operations, sold in secondary markets, repaired, refurbished, etc. This helps to minimize required storage space and energy consumption.

As stated in “Economic and Social Value of Green Logistics”, cost is one of the main barriers to implementing green logistics practices in emerging economies, implying that less costly practices are more prevalent in these countries. However, cases of successful use of high technology in emerging economies exist: in Colombia for instance, Copidrogas, one of the country’s main pharmacy chains, created an Automatic Warehousing System with excellent results for its operations.

Value Added Services Value added services are the third type of operations considered within this analysis. Since outsourcing is currently still one of the main trends in logistics, several value added services have evolved to meet the logistical needs of companies. Some of these services help to improve the logistics process in such a way that companies benefit from loss reduction and process improvement. This is another way that companies are greening their logistics activities. A major concern for companies is that any mistake or loss through the chain will trigger contin-

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Green Logistics

Table 3. Green Warehousing Practices and their Classification Â€Â€Â€Â€To use Less


Clean Vehicles/ Fuel Efficiency



Reconditioning and Reuse of Pallets and Containers


Flow and Activity Optimization


Automatic Warehousing Systems Minimization of Inventories



Â€Â€Â€Â€X Â€Â€Â€Â€X

On-site Recycling Disposition of products

gency processes that involve higher consumption of resources. This extra-consumption translates into less efficient activity both in economic and environmental terms. Therefore, any activity that helps companies to control and more efficiently execute their direct logistics flow will also help them to perform better in environmental terms. Some examples of these value added services: pallet and container pooling, which involves reutilization of containers; tracking and tracing, which helps to control the chain and avoid losses of goods, and packaging technologies that reduce the number of losses during transportation and warehousing.

342



Facility Design

•


Pallet and container pooling: pooling, combining and sharing of assets in a common effort, is by definition an environmentally sustainable concept, since it optimizes asset utilization. The system allows companies to rent pallets when they need them and it shifts the responsibility for creation, maintenance and reconditioning of pallets and containers to a third party. The world’s leading company in this segment is CHEP. CHEP does business with tree farms accredited as responsible and sustainable sources of timber. The pooling model encourages the repair and the reuse


•

of the pallets and recycling of broken or damaged components rather than disposing of them in landfills. The company introduced several practices to operate in an environmentally sustainable manner. This may have been one of the world’s first initiatives for greening the value chain, since CHEP has pooled pallets and containers since 1958. Tracking and tracing: additional services like tracking and tracing are now key factors in company development. The control of product flows and avoidance of losses are important contributions in efforts to promote the greening of the value chain. Information management helps companies to prevent returns, because they know exactly when a product will expire, or to manage returns efficiently, optimizing the management of resources. This category also includes technologies such as Radio Frequency Identification (RFID), which helps to identify products in a unique way, without direct visual contact. This allows companies to conserve resources and to track damages and individual product characteristics, providing instant traceability regarding the status of various products. Marks & Spencer introduced RFID tech-

Green Logistics

Table 4. Green Value Added Services Practices and their Classification Â€Â€Â€Â€To use Less



Â€Â€Â€Â€Pallet and Container Pooling




Â€Â€Â€Â€Tracking and Tracing



Â€Â€Â€Â€Packaging Technologies and materials



Â€Â€Â€Â€Environmental certifications



•

•

nology in their operations, providing physical control of its stock on a day-to-day basis, thus avoiding product losses and improving control over the flow of its goods. Packaging technologies: packaging is a very important part of any product. One of the main causes of product losses are transportation damages due to inadequate packaging. On the other hand, residuals generated by product packaging are also an important source of residuals. One way of dealing with packaging issues is to introduce innovative practices in packaging technologies that help companies to minimize damage in transportation at the same time that residuals are minimized or appropriately discarded. Environmental certifications: environmental certifications such as ISO 14000 address various aspects of environmental management. The first two standards, ISO 14001:2004 and ISO 14004:2004, deal with environmental management systems (EMS). ISO 14001:2004 provides the requirements for an EMS and ISO 14004:2004 gives general EMS guidelines. Other standards and guidelines in the family address specific environmental aspects include labeling, performance evaluation, life cycle analysis, communication and auditing. Through these types of standards, companies are compiling a complete set of environmental practices, not only in their logistics system but also in their entire business activity.



Table 4 summarizes the value added services practices and their classification among green logistics strategies.

Green Logistics Practices Matrix To summarize the practices mentioned above, Table 5 classifies them according to their hierarchical level within the company: strategic, tactical, or operational, depending on the implications of each practice for the companies’ performance. As stated in the introduction of this chapter, the implementation of green logistics is influenced by different factors: drivers (increasing customer awareness, increasing prices for raw materials and energy, environmental legislation, pressure from dominant actors) as well as barriers (cost, lack of awareness, coordination and communication, and resistance). Depending on the “values” of each factor, companies have different positive as well as negative incentives to implement green logistics practices. Two cases, which form the end-points of a continuum, can in general be distinguished: •

In case of a high customer awareness and high prices for raw materials and energy (both refer to competitive priorities of a company) in combination with a strong environmental legislation and high pressure from dominant supply chain actors (both are restrictions for doing business in a market) companies will probably cover a wide variety of practices on all hierarchical management levels. In this case, 343

Green Logistics

Table 5. Green Logistics Practices Matrix Â€Â€Â€Â€Strategic

Â€Â€Â€Â€Tactical

Â€Â€Â€Â€Operational

Â€Â€Â€Â€Transportation

• Change of truck fleets • Standardization of truck sizes • Creation of distribution centers • Sustainable carrier selection

• Palletization • Freight consolidation • Reuse of pallets and containers • Modal choice

• Carbon footprint assessment • Clean vehicles • Fuel efficiency • Load optimization

Â€Â€Â€Â€Warehousing

• Automatic Warehousing Systems • Facility design and construction

• Selection of different equipment • Reconditioning and reuse of pallets and containers • Disposition of products

• Clean material handling equipment • Fuel efficiency • Energy efficiency • Process optimization • Minimization of inventories • On-site recycling

Â€Â€Â€Â€Value added Services

• Carbon footprint assessment • Green customer criteria gathering • Introduction of tracking and tracing systems

• Environmental certifications • Pallet and container pooling systems • Use of different packaging technologies and materials to reduce contamination

• Environmental footprint reports • Use of tracking and tracing systems to improve operations performance

•

low values of the barriers can be assumed which are dominated by high values of the drivers. In case of low values of the drivers and high values of the barriers like implementation cost and lack of manager awareness, companies will probably not implement environmental practices in a systematical way. In this case, an implementation of green practices could just be considered as a by-product of activities focused on efficiency issues and cost reduction (e.g. load optimization and fuel efficiency).

While a concrete relation between values of factors and practices is in general difficult to prove, the above mentioned drivers and barriers identified in literature indicate the existence of differences concerning the implementation of green logistics between countries and regions, as factors like environmental legislation and awareness levels differ on higher aggregated levels of economic systems than the company level. The observations that differences of economic meta-systems have an impact on the implementation of green logistics and that the application of

344

green logistics practices in emerging markets, in comparison with highly developed markets, is not widely diffused so far, are leading to the following question addressed in the next part: how do emerging market characteristics influence the implementation of green logistics system and practices?

GREEN LOGISTICS IN EMERGING MARKETS: CHARACTERISTICS, IMPACT, AND CASES The following section addresses the likely impact of emerging market characteristics on the implementation of green logistics systems. It also describes two cases of successfully implemented green logistics practices: BP Colombia and the Mexican Green Supply Chain Program (MGSCP).

The Impact of Emerging Market Characteristics on the Implementation of Green Logistics The implementation of green logistics must overcome several general barriers, which, as mentioned

Green Logistics

Table 6. Emerging Market Characteristics and their likely Impact on the Implementation of Green Logistics Systems (Based on Oral et al. 2003, Khanna et al. 2005, Arvis et al. 2007) Â€Â€Â€Â€Dimension

Â€Â€Â€Â€Likely Impact on the Implementation of Green Logistics Systems

Â€Â€Â€Â€Characteristics

Â€Â€Â€Â€ Political & Legal System

• Government’s lack of maturity; planning horizon often limited by legislative period • Inefficient controlling systems • Low regulation • Lobbyism and Corruption

• Incentives to introduce green logistics practices are low • Lack of environmental legislation as driver for green logistics • Lack of long-term sustainability plans

Â€Â€Â€Â€Social System

• Poverty and inequality • State of underdevelopment of rural areas • Low investment into education and health • High power distance culture • Lack of collaboration

• Lack of environmental awareness as driver for green logistics • Consumer behavior in many customer segments focused on low product prices; limited options for companies to shift investment cost on consumer • Top management avoid participative decision making • Focus on dedicated instead of shared resources

Â€Â€Â€Â€Capital Markets

• High inflation rates • High interest rates

• No tendency towards investment • Tendency towards materials, sub-product, and product inventories

Â€Â€Â€Â€Labor Markets

• Low labor costs • High costs of training

• Limited tendency to increase labor productivity by implementing technologies • Limited training within companies

Â€Â€Â€Â€ Infrastructure & Resources

• High cost of technology • High maintenance costs • Low public and private investments in public infrastructure (e.g. technology and transport systems)

• Limited funds for implementation of technologies • Limited preventive maintenance • Underdeveloped transport systems (focus on trucks) and information systems

Â€Â€Â€Â€Logistics System

• Low logistics performance indexes (e.g. qualification gaps, tracking and tracing) • High cost of transportation and warehousing • Less use of third party logistics service providers

• Lack of modern and integrative logistics concepts • Lack of standardization • Short-term cost-minimization dominating

above, are global phenomena – in highly developed as well as emerging markets. The term “emerging market” was used originally by the International Finance Corporation (IFC) to describe a narrow list of middle-to-higher income economies among the developing countries, with stock markets in which foreigners could buy securities. The World Bank defines developing countries as those countries with low-income and middle-income economies, i.e. economies with a GNI per capita lower than $9,265 (World Bank, 2002). Previous research shows that the implementation of logistics concepts can be negatively influenced by certain characteristics (Lawrence & Lewis 1996, Oral et al. 2003), which a majority emerging markets exhibit.

Based on existing findings (Oral et al. 2003, Khanna et al. 2005, Arvis et al. 2007), Table 6 presents emerging market characteristics and their likely impact on the implementation of green logistics systems. Confronted with such business conditions, companies and value chains operating in emerging markets face additional obstacles to greening their logistics systems compared to organizations in highly developed economies. One main consideration reflected in Table 6 is that, due to the characteristics of the political system, it is difficult to find a highly developed environmental legislation in emerging markets that could propel green logistics practices. Additionally the lack of control and the level of corruption en-

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Table 7. Green Logistics Practices in Emerging Markets Â€Â€Â€Â€Strategic

Â€Â€Â€Â€Tactical

Â€Â€Â€Â€Operational

Â€Â€Â€Â€Transportation

• Creation of distribution centers

• Freight consolidation

• Fuel efficiency • Load optimization

Â€Â€Â€Â€Warehousing

Â€Â€Â€Â€---

• Reconditioning and reuse of pallets and containers

• Fuel efficiency • Energy efficiency • Process optimization • Minimization of inventories

Â€Â€Â€Â€Value added Services

• Introduction of tracking and tracing systems

Â€Â€Â€Â€---

• Use of tracking and tracing systems to improve operations performance

able companies to evade full compliance lowering the legislation’s impact in those countries. On the other hand, factors such as poverty and inequality, lack of public infrastructure and low logistics performance indexes lead to a different set of priorities for the stakeholders of a value chain in comparison with the priorities of stakeholders in highly developed markets. This difference implies lower customer interest regarding green issues and reduces the positive effect customer awareness can have as driver for implementing green practices. A different situation may arise when a better informed and more demanding market actor located in a highly developed market evaluates a chain’s performance including its operations in emerging markets; this situation may call for “responsible acting”, encouraging the use of an actor’s dominant position to force its global business partners to implement green practices. An effective response from these actors may also serve as a strong driver to change the mindset of several business actors in emerging markets and eventually of a major part of the society. Finally, it is important to state that low labor costs and high interest as well as inflation rates have a negative impact on implementing new technologies and on substituting labor by capital. Therefore, some of the activities reaching cost savings and environmental friendliness simultaneously do not have a high priority in emerging markets. One example refers to the process cost

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of truck loading: in developed markets, high labor cost leads to a dominant use of palletization and forklift trucks. In emerging economies on the other hand, low labor cost prevail manual process execution. The analysis of emerging market characteristics may suggest that green logistics activities in such business environment focus on the following practices (see Table 7):

Cases BP’s “Green” Efforts: A Global Company in an Emerging Market BP’s presence in Colombia dates back to 1986. Focused in the upstream line of business, BP is responsible for the operation of the Cusiana and Cupiagua complex, Colombia’s major oil finds to date, representing approximately 1.6 billion barrels of oil (BP, Exploring Casanare, 2010). The complex produces at an average rate of 148,000 barrels of oil and 200 million cubic feet of gas per day (BP, BP in Colombia at a Glance, 2010). Operations involved drilling over 130 wells, building and working two major processing installations, and managing a 200-kilometre network of flow lines connecting wells to facilities. The Colombian Ministry of Environment has granted BP over 120 licenses to operate on Colombian soil based on the development of the Integrated Management System (IMS), which

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Figure 3. Operating Management System (BP, The OMS Framework 2010)

brings together both the ISO 14001 and OHSAS 18000 standards. “… IMS includes one called ‘Efficient natural resource management’ that sets out specific goals, targets, activities and parties responsible for delivery in the areas of: Air; Community; Drilling & Workover residue and discharges; Energy efficiency; Liabilities; Flaring and venting; Ozone; Waste management; Water management; and Green Office.” (BP, Protecting the Environment, 2010). Global Strategic Management IMS covers the Operating Management System (OMS), a global corporate initiative that serves as the cornerstone for value creation and BP’s commitment to health, safety, security and environmental (HSSE) policy implementation. The policy, part of the company’s long-time organizational values (BP p.l.c., 2009), reads, in its latest version (November 3, 2008), as follows:

“Our goals are simply stated – no accidents, no harm to people, and no damage to the environment. We will operate our facilities safely and reliably and care for all those on our sites or impacted by our activities. Everybody who works for BP, anywhere, is responsible for getting HSSE right. The health, safety and security of everyone who works for us are critical to the success of our business. We will continue to drive down the environmental and health impact of our operations by reducing waste, emissions and discharges, and using energy efficiently. We will produce quality products that can be used safely by our customers.” Although always a major issue for BP, the 2005 fire and explosion at the isomerization plant at the BP Products North America-owned and operated refinery in Texas City, Texas, USA (Mogford 2005) and the 2006 leak of the BP-operated Alaskan pipeline, fueled the company’s drive to reach higher levels of awareness and performance on HSSE. The OMS is a major instrument for this purpose. 347

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Table 8. CO2 Emissions and Cost Reductions due to Change of Transportation Mod (PSCM – Logistics BP Colombia, 2010) Â€Â€Â€Â€AIR FREIGHT

Â€Â€Â€Â€Load (Ton)

Â€Â€Â€Â€Distance (Km)

Â€Â€Â€Â€CO2 Emissions (Kg)

Â€Â€Â€Â€Transportation Cost (USD)

Houston - Bogotá

294,136

3500

5,147,380

500,031,20

Diesel Truck Bogotá - Cusiana

294,136

350

Â€Â€Â€Â€January 1 – October 31 Â€Â€Â€Â€2008

TOTAL Â€Â€Â€Â€SEA FREIGHT

10,219

23,530.88

5,157,599

523,562.08

Â€Â€Â€Â€Load (Ton)

Â€Â€Â€Â€Distance (Km)

Â€Â€Â€Â€CO2 Emissions (Kg)

Â€Â€Â€Â€Transportation Cost (USD)

Houston – Cartagena

294,136

2900

8,530

44,120.40

Diesel Truck Cartagena – Cusiana

294,136

1450

42,334

47.061,76

50.864

91.182.16

Â€Â€Â€Â€January 1 – October 31 Â€Â€Â€Â€2009

TOTAL CO2 Emission reduction 2008 Vs 2009 Cost Reduction 2008 Vs 2009

According to BP’s OMS overview (2010), the system serves as the single framework for operations, consolidating BP’s requirements relating to process safety, environmental performance, legal compliance in operations and personal, marine and driving safety (see figure 3). The OMS in Colombia While it is a global initiative and a set of general guidelines, the OMS aims to respond to each of BP’s local business conditions. In a two-way interaction between the system and the location, eight dimensions of the operating model (leadership, organization, risk, procedures, assets, optimization, privilege to operate and results) are customized according to the performance improvement cycle and the local business processes characteristics (see figure 3). In the specific case of Colombia, the OMS implementation process became part of the company’s integral management system and is

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5,106,735 Kg USD 432,379.92

recognized as the local system of the Colombian BU (BP Colombia, 2009). Two major initiatives comprise the focus of the local system in Colombia. One is to comply with HSSE policy and OMS’s guidelines of no damage to the environment, and in this context, BP Colombia decided on “greening” its logistics by reducing CO2 emissions associated with its international transportation activities. Based on an improved planning and supply system, the company was able to lower the quantity of “urgent” requisitions and to aggregate demand, so that air freight was not required. The initiative allowed BP to ship from the United States to Colombia, between the months of January and October of 2009, approximately 294 ton of cargo by sea that otherwise would have traveled by air. The use of sea freight instead or air freight required the company to change the destination in Colombia, from Bogotá to Cartagena. Cartagena is located 1100 Km north from the capital city Bogotá, and about 1450 Km away from Cusiana and Cupiagua

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Complex, the final destination of the cargo. The change of the destination caused an increase of the use of trucks of about 300%. Nevertheless, indicators on CO2 emissions and cost reduction for both years 2008 and 2009 proved the change was timely and performance increased significantly from one year to the next (see Table 8). On the other hand, in order to support and to help develop the “global” OMS, BP Colombia (Andean SPU) was put in charge of developing four case studies to outline a methodology to gather information on how to assess the supply chain life cycle, how to influence and how to reduce waste and emissions. BP’s case studies highlight some of the company’s environmental and social initiatives from around the world (BP, Case Studies Library, 2010) and serve as benchmarks or “best practice” references for internal operations. The case project scope and deliverables cover, but are not limited to, logistic activities and plan to deliver one case that applies to BP’s global supply chain, one case related to the regional (Latin-America and the Caribbean) business issues and two cases that elaborate on and improve the local performance of the company. Logistics topics include load aggregation, transportation mode selection, packing selection and packing disposition, fleet management, emission reduction and outsourcing decisions. The case studies development process compels the company to think about the specifics of the operation, while serving as a culture development tool that integrates several actors from within and from outside the company. Such tasks help to build and to strengthen the company-stakeholder relationship, as suppliers, customers and communities participate in the effort to improve the processes. The Outlook Given its embedded culture, a change in the BP’s course, values or general strategy does not seem very likely in the next five to ten years. Yet its stated objective is to do business in a sustainable

way, meaning that everything the company does each day should contribute in some way to the long-term health of BP and that of the environment and society (BP p.l.c., 2009), BP’s awareness of its position in the supplier and customer markets and its clear idea regarding the “privilege [it has] to operate” in the locations where it works, have caused the company to develop a sense of recognition of its business partners. This recognition has led to the promotion of a “greener” global framework in which the company’s priority is the development of responsible value creation endeavors. BP understands a “greener” global framework as an opportunity to influence its business partners’ behavior into environmental friendly operations, whether by exercising its leadership position within the chain or by increasing the visibility of rising performance indicators throughout the entire chain. Either way, working in conjunction with its stakeholders is a “must do” for the company. In the years to come BP has determined that it will “…retain focus on the fundamental priorities of managing risk, with a particular focus on sensitive areas; driving continuous improvement; and complying with applicable laws and regulations” (BP p.l.c., 2009, p. 10). Finally, with the latter on mind and the growing requirements for energy all around the world pushing companies such as BP, to deliver on its offer, new projects are in the planning stages or already underway. Developing offshore activities and expanding the natural gas plant are among the most important projects scheduled, for future years in Colombia, to respond to the market needs. Logistics activities related to these projects are a major source of opportunities to create value responsibly. With this in mind, BP has decided implement environmental requirements for all these activities, based on four principles (BP Colombia, 2009, p. 25): 1) identify and understand impact, 2) identify sensitive areas, 3) design to avoid adverse impacts and minimize the use of

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natural resources and 4) reduce the residual impact of residues, emissions and discharges.

Supply Chains and the “Greening” of SMEs: The Case of a Mexican Program This case illustrates the experiences of the Mexican Green Supply Chain Program (MGSCP) and its benefits, specifically in the field of green logistics. The Commission of Environmental Cooperation in North America (CEC) developed the program in order to create an effective, replicable cooperation-based mechanism for promoting competitiveness through pollution prevention in small and medium-size enterprises (SMEs) that supply large companies. The higher goal of the CEC in starting the program was to address the challenge of implementing beneficial environmental practices and/ or management systems in SMEs, especially in developing countries. Despite the importance of this type of enterprise in the sustainability of international business, the promotion of environmental improvements is daunting due to a lack of motivational drivers. Generally, the main drivers for environmental improvements by industry are pressures from environmental authorities and customer requirements. These drivers are virtually absent for SMEs in developing countries due to weak regulatory institutions and a lack of environmental consciousness on the part of local customers. In order to address this problem, in 2005 the Commission on Environmental Cooperation (CEC) developed a Green Supply Chains Program as a result of the official mandate confirmed in the Puebla Declaration. The CEC is an international organization created by Canada, Mexico and the United States under the North American Agreement on Environmental Cooperation (NAAEC). The CEC was established to address regional environmental concerns, to help prevent potential trade and environmental conflicts, and to promote the effective enforcement of environmental law.

350

The Agreement complements the environmental provisions of the North American Free Trade Agreement (NAFTA). The experiences and results described in this case respond to the pilot phase of the program developed in the period from September 2005 until May 2008. This pilot phase had the participation of 14 multinational companies with operations in Mexico and 134 local Small and Medium Sized Enterprises (SMEs) that serve as first tier suppliers of these large anchor companies. The Program Design The design of the program builds on earlier experiences with a wide range of initiatives related to the promotion and the adoption of eco-efficiency and cleaner production strategies in SMEs. The design of the program aimed to overcome the main limitations of such experiences by introducing an innovative combination of tree main design features: 1. Eco-efficiency and cleaner production: Eco-efficiency and cleaner production are strategies that could transform the vicious circle of poor environmental management in SMEs. Both concepts link environmental improvement to cost reduction and to innovation, through pollution prevention and alternatives such as process optimization, product innovation, raw material reduction or replacement and recycling. Adopting these prevention-oriented measures could be attractive for SMEs as an alternative to improving their competitiveness. 2. Supply chain power to trigger SME participation: Supply chain power was applied as main force to motivate SMEs to participate in the program. Leading companies in the supply chains, the anchor companies, invited their suppliers to participate in the program and supervised the implementation of their improvement projects. This lowered transaction costs, convincing SMEs to participate

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in the program. Once the leading company decided to take part in the program, management commitment from SME suppliers followed. 3. Learning by doing as implementation method: Capacity building in eco-efficiency and cleaner production concepts and tools formed the core method and bases for the design and implementation of improvement projects. In ten meetings, a group of about 10-15 general and operation managers of suppliers of the same supply chain learned about the application of eco-efficiency and cleaner production tools. Throughout the capacity building process, they designed their own project, shared knowledge and exchanged experiences with their counter parts. The “in-house” appropriation of the projects and the group process motivated the actual implementation of improvement projects. An internet platform provided access to accumulated knowledge generated during the program and to facilitated collaborative learning based on the different supply chains participating in the program. Organization of the Program The CEC coordinated the overall management of the program in alliance with the Mexican chapter of the Global Environmental Initiative (GEMI) and the Secretary of Sustainable Development of the Queretaro State (SEDESU). The first two phases of the program, which took place in 2005 and 2006, included participation by six leading multinational companies (Bristol Myers Squibb, Colgate-Palmolive, Clarion Industries, SIKA, Janssen-Cilag, and Jumex) and 65 SMEs from their supply chains in Mexico. In September 2007 a third group of multinationals and local supply chains entered the program, among them Nestlé, Grupo Modelo, Henkel, La Corona, Guardian

Industries, Bombardier, Collins & Aikman, and Donnelly, involving altogether 79 suppliers. The participating anchor companies assumed a number of commitments: (CEC, 2005) (i) select and invite at least 10 providers from their supply chain, (ii) provide logistics (meeting room and drinks), during the development of the program (ten meetings), (iii) assign a representative to oversee the activities of the program (workshop meetings, communications) and (iv) follow up on the evaluation of the results and the implementation of the designed eco-efficiency projects. Service providers were hired to develop the capacity building in the various supply chains and to develop the related material. Figure 4 shows the organization of the Mexican Green Supply Chain Program. In all, 146 SMEs from different industrial sectors participated in the program. About one fourth belonged to the packaging industry (carton boxes, plastic bags, plastic containers, foam, pallets), 17% to the printing sector (manuals, promotion material, labels, etiquettes), 27% represented raw material supplies (chemicals, yeast, fruit, species, fragrances, metal parts), 23% services (transport, water treatment, cleaning, re-manufacturing, maintenance) and 7% general supplies (fuels, office material, cleaning material, uniforms). Over 50% of the suppliers directly influence the green logistic operations of the participating supply chains improving transport systems, packaging systems, recycling and take-back of waste between others. The total costs of the operations program were approximately US $350,000. These costs included payments to service providers and the logistics costs of the capacity building and promotion events. The CEC provided financing for the payment of service providers; the leading companies of the supply chain provided the logistics of the capacity building process of their own supply chain. Investments related to implementation of the improvement projects came from the individual enterprises.

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Figure 4. Organization of the Mexican Green Supply Chain Program

Results The results of the program account for the improvement projects implemented within the program’s framework. In total 146 enterprises, between 132 SMEs and 14 anchor companies, formulated improvement projects using the eco-efficiency and cleaner production strategy. The projects included the implementation of good housekeeping practices (adopting sound operation and maintenance procedures), modification of technology (changes in equipment and technology, substitution of input materials) or new activities (on-site recycling, modification of products). •

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Economic benefits: The investment required for the implementation of these eco-efficiency and cleaner production projects totaled over US $8 million. The mean payback period per project was 0.68 years, or just over 8 months, with a standard deviation of 1.05 years. The estimated annual benefits of the formulated projects represent over US $11 million per year.

•

When we take in to account an average of 5 years of perturbation of these benefits, and considering a discount rate of 20%, the net present value (NPV) of the economic benefits yields a total of US $21.6 million. It is essential to keep in mind that these values are based on expected costs and benefits, not actual outcomes. There may be errors in estimation of the costs, benefits, discount rates, or benefit durations. Regardless of the details, the value created by the program is impressive. Environmental benefits: The estimation of the environmental benefits of the program is also based on calculations elaborated by the participants in the “learning by doing” capacitating program. Total environmental benefits are represented by pollution prevention due to savings on raw materials, energy use, water use and waste generation. In total the formulated projects are expected to save about 277,093 m3 of water use, prevent the generation of 4.3

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Table 9. Summary of the Mexican Green Supply Chain Program Statistics Â€Â€Â€Â€Characteristics

Â€Â€Â€Â€Generation 05/06



Â€Â€Â€Â€Total

# of Supply Chains

4

4

9

17

# of participating companies2

28

38

79

145 99

SMEs involved1 Implementation level of projects Estimated economic benefits (US$/year)4

18

25

56

80%2

85%2

70%3

$1,083,492

$ 2,234,598

$ 8,831,265

$ 12,149,355

866

1,092

6,964

8,305

Savings in water use (m3/year)

15,305

120,339

141,449

277,03

Waste prevention (tons/year)

206,161

1,907

4,297

212,366

GHG reductions (tons CO2/year)

SME in Mexico = company < 250 employees Reported by the companies 31/06/2007 3 Estimation of involved consultants 15/03/2008 4 Exchange rate 1 US $ = 10.70 $MX 1 2

•

tons of solid waste, and 8,300 tons of CO2 (greenhouse gas equivalent). If we consider these benefits to persist for 5 years (average life cycle of the implemented changes) these benefits total 1,385,465 m3 of water, 21.5 tons of solid waste and 41,500 tons of CO2 emissions. Supply chain collaboration and learning: Besides the tangible economic and environmental benefits, the Mexican supply chain program also contributed to capacity building and the improvement of relationships, mutual understanding and collaboration between suppliers and the anchor company. About 291 representatives of enterprises participated in the capacity building meetings. Over 95% confirmed an improvement in trust and relations with their supply chain partners, and maintained their motivation and capacity to design eco-efficiency and cleaner production projects. Three of the 14 leading anchor companies, Colgate-Palmolive, Bristol Myers Squibb, and Jumex repeated their participation in the program with different groups of suppliers.

Table 9 shows a summary of the pilot-phase results of the Mexican Green Supply Chain Program developed between September 2005 and May 2008. Outlook The influence of the Mexican Green Supply Chain Program is evident in its contribution to the diffusion of eco-efficiency and cleaner production alternatives in SME suppliers of large companies and on its contribution to greening the logistics of productive chains. Its positive and efficient costbenefits relation makes the program an interesting benchmark in the field of green logistics and supply chain strategies. Based on these experiences, in 2008 the Secretary of Environmental and Natural Resources of Mexico adopted the program on a national scale. As of January 2010, over 30 leading companies and 500 SMEs have taken part in the second phase of this program which is planned to be continued until the end of 2012 (Liderazgo Ambiental para la Competitividad, 2010). From the SMEs perspective, the experience demonstrated the potential to improve their competitiveness and environmental performance by means of eco-efficiency and cleaner production alternatives. The case shows how significant 353

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benefits are possible, especially when preventive oriented alternatives assure future persistence of savings. In addition, the leading anchor companies confirmed their perspectives regarding 5 different elements of the program: 1. Tacit economic benefits of the design and implementation on internal eco-efficiency projects. Clarion, Jabones la Corona and Guardian Industries mention these benefits as most the most important results of their participation. Additionally, Colgate-Palmolive reported a benefit of US $500, 000 due to a tax exemption obtained after communication to the Federal Environmental Protection Office (Profepa) of its environmental advances, including their participation in the GSCP. 2. Strengthen the internal organizational commitment: Three anchor companies, Grupo Modelo, Colgate-Palmolive and Bristol-Myers Squibb, considered the process of integration between the purchase department and the environmental department of their organizations as an important benefit of their participation. In the case of Bristol-Myers Squibb and ColgatePalmolive, environmental criteria were part of suppliers’ evaluation criteria. 3. Reputation within the corporation network: Janssen Cilag and Clarion obtained corporate sustainability awards because of their participation in the GSCP. Most of the other companies communicated their results in internal newsletters. Only Grupo Modelo mentioned the publication of their participation in the GSCP in their corporate CSR report. 4. Strengthen the collaboration in the supply chain: Almost all the anchor companies improved relationships with their suppliers as a benefit of the program. Improvements show an increase of trust and of information exchange, along with better understanding

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of their processes. Such benefits, while less tangible, are nonetheless valuable. 5. Capacity building: Anchor companies such as Jabones la Corona, Guardian Industry and Grupo Modelo expressed the appropriation of an effective improvement methodology by their internal personnel as a benefit of the their participation in the GSCP. Both cases demonstrate successful approaches of implementing green logistics practices in an emerging market context. BP’s case illustrates how an improved planning and communications system enabled the company to overcome the impact of lack of modern and integrative logistics concepts and of high cost of technology, which characterize emerging markets, have on the company’s green initiatives in Colombia. The new system allowed BP to set in place two simple but effective practices, one tactical and one operational, to green its logistics. On one hand, the company made a transport mode decision based on mid- and long-term planning, rather than relying on its previous urgency-driven short-term response. In addition, BP was able to consolidate import freight with Colombia destinations, bundling the resource requirements. Both practices improved the transportation function’s green and economic performance indicators. The Mexican Green Supply Chain Program case shows how multinational companies can use their dominant position within supply chains to introduce practices and to overcome typical barriers in emerging markets concerning political, legal and social system characteristics as well as infrastructure and resource problems. A dominant chain actor set off a chain reaction to change the behavior of its small- and medium-sized business partners operating in these markets. Challenges due the lack of legislation and environmental awareness, of limited funds to implement new technologies and of missing integrative logistics concepts were overcome through collaborative

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efforts that allowed the actors of most parts of the supply chain to participate in the initiative to green their operations and logistics. The cases can serve other companies–multinationals as well as nationals–as examples on how to implement and to manage their own green logistics initiatives. Individual and cooperative endeavors can deliver a significant amount of benefits and may position the companies taking part of them as first movers or early followers and often market leaders.

CONCLUSION Companies and value chains currently have many options when configuring green logistics systems. The high potential of green logistics as a cross-functional and cross-organizational approach to providing economic and social value to companies, chains, and societies might shift logistics into the position of a key contributor to achieve sustainable development. This is also valid for emerging markets, which face special market conditions that inhibit the implementation of green logistics systems. By describing the potential, practices and barriers of green logistics in the modern business environment, and in particular addressing emerging market issues, these findings aim to support companies in the process of rethinking and restructuring their current logistics practices.

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Liderazgo. (2010). Ambiental para la competitividad. Retrieved March 10, 2010, from http:// liderazgoambiental.gob.mx/ portel/ libreria/ php/ decide. php? patron=03 Makower, J. (2010). State of green business 2010. Greener World Media. Mogford, J. (2005). Fatal accident investigation report. Isomerization unit explosion final report. USA: Texas City. Oral, E. L., Mistikoglub, G., & Erdisc, E. (2003). JIT in developing countries–a case study of the Turkish prefabrication sector. Building and Environment, 38(6), 853–860. PSCM. (2010). Logistics green supply initiative, Andean SPU. Bogotá, Colombia: Corporate Presentation. Robeson, J., Copacino, W., & Howe, R. (1992). The logistics handbook. New York, NY: Prentice Hall. Rogers, D. S., & Tibben-Lembke, R. S. (1998). Going backwards–reverse logistics trends and practices. Reno, NV: Reverse Logistics Executive Council. Russel, S., & Allwood, J. M. (2007). Sustainable manufacturing: Options for physically changing the way in which goods are made. Journal of Industrial Ecology.

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Seuring, S., & Müller, M. (2008). From a literature review to a conceptual framework for sustainable supply chain management. Journal of Cleaner Production, 16(15), 1699–1710. doi:10.1016/j. jclepro.2008.04.020 Stock, J. R. (2001). The 7 deadly sins of reverse logistics. Material Handling Management, 56(3), 5–11. Tesco. (2010). Direct carbon footprint of Tesco. Retrieved March 8, 2010, from http://www.tesco. com/ climatechange/ carbonFootprint.asp Van Wassenhove, L., & Geyer, R. (2002). The impact of constraints in closed-loop supply chains – the case of reusing components in durable goods. Proceedings of the 10th LCA Case Studies Symposium on Recycling, Closed-Loop Economy and Secondary Resources, Barcelona, Spain.

Voigt, K.-I., & Thiell, M. (2004). Industrial reverse logistics systems–a model-based analysis of alternative organizational forms using the example of the automotive industry. In Prockl, G., Bauer, A., Pflaum, A., & Müller-Steinfahrt, U. (Eds.), Entwicklungspfade und Meilensteine moderner Logistik – Skizzen einer Roadmap (pp. 389–418). Wiesbaden. WCED. (1987). World Commission on Environment and Development: Our common future. Oxford, UK. World Bank. (2002). Global economic prospects and the developing countries. New York, NY: World Bank. Wu, H.-W., & Dunn, S. C. (1995). Environmentally responsible logistics systems. International Journal of Physical Distribution & Logistics, 25(2), 20–38. doi:10.1108/09600039510083925 Yanbo, L., & Songxian, L. (2008). The forms of ecological logistics and its relationship under the globalization. Ecological Economics, 4, 290–298.

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Chapter 19

The Impact of SustainabilityFocused Strategies on Sourcing Decisions Ozan Özcan University of South Florida, USA Kingsley Anthony Reeves Jr. University of South Florida, USA

ABSTRACT This book chapter examines the relationship between the pursuit of a sustainability-focused corporate strategy and the level of vertical integration observed in organizations. The study makes two contributions. First, it develops the theoretical foundation for linking sustainability strategies to organizational structure. Second, it empirically examines the vertical integration level of 144 sustainability-focused companies in 9 different industries. The results demonstrate that sustainability-focused companies in the healthcare industry and the industrials industry tend to have more vertically integrated organizational structures than their industry competitors that are not pursuing such a strategy. There was no significant difference in the vertical integration level of sustainability-focused versus non-sustainability-focused companies for the other seven industries studied. In the literature, the linkage between environmental strategies and vertical integration has not been thoroughly examined. These study results should be useful to researchers and managers who are interested in corporate sustainability behavior.

INTRODUCTION This study contributes to our understanding of the relationship between supply chain structure and the pursuit of sustainability-focused corporate DOI: 10.4018/978-1-60960-531-5.ch019

strategies. The issue of sustainability has become both a national and global focus. For example, issues of sustainability are at the heart of President Obama’s energy and environmental policy. These issues include: aiming to generate 25 percent of electricity from renewable sources by 2025, investing $150B over the next ten years in “cleantech,”


The Impact of Sustainability-Focused Strategies on Sourcing Decisions

and putting one million plug-in hybrid cars on the road by 2015. Furthermore, The Brundtland Commission has indicated the need for sustainable development in order to meet the needs of the present without compromising the ability of future generations to meet their own needs. At the grassroots level; employees, environmental activists, communities, and non-governmental organizations are increasingly applying pressure to companies to consider sustainability principles as they manage the material and information flows along their supply chains. Even consumers are making sustainability-focused decisions when they purchase vehicles or decline plastic bags at supermarkets. According to a recent Deloitte survey1 of more than 1,000 business travelers in April 2008, 95 percent of respondents thought that lodging companies should be undertaking green initiatives. A company’s strategic plan provides guidance for the decisions it makes regarding its products, processes, and its supply chain. An example of a decision that is greatly influenced by company strategy is the make-buy decision. The make-buy decision is particularly critical for firms pursuing a sustainability-focused strategy because such companies require that every aspect of the supply chain have a similar focus (i.e. such firms view sustainability holistically). This requirement introduces an additional constraint that is unique to firms pursuing such a strategy. For example, while a sustainability-focused firm may want to outsource a particular product or service, if there are no sustainability-focused suppliers of the product or service they may opt to develop the capability internally. As a result, sustainability-focused companies may tend to be more vertically integrated relative to their nonsustainability-focused counterparts, particularly in the early stages of the sustainability movement life cycle when there are a limited number of suppliers committed to this strategy. In this book chapter, we examine this hypothesized trend toward vertical integration in make-buy decisions

for sustainability-focused companies. Vertical integration may enhance performance, profitability, and market competitiveness because of better supply chain coordination. The literature indicates that an increased level of integration across the supply chain is necessary in order to pursue a sustainability-focused strategy (e.g. see Hart, 1995; Russo and Fouts, 1997). However, under some industry, product, and market conditions, having a vertically-integrated organization structure is not reasonable. These conditions will be discussed in “Reasons for Vertical Integration or Diversification”. Thus, there appears to be a potential for tension for some companies that set out to pursue a sustainability-focused strategy. That is, while firm capabilities, firm culture, and industry dynamics may make outsourcing the preferred solution, there is dual pressure to vertically integrate simply as a result of the pursuit of a sustainability-focused strategy. This book chapter will explore this issue and determine if sustainability-focused companies tend to be more vertically integrated regardless of industry. As an empirical study, we will analyze the vertical integration level of 116 sustainabilityfocused companies in the United States Dow Jones Sustainability Index. Unlike previous studies that employed surveys, we use objective economic data and employ the measurement method of Fan and Lang (2000), which is a widely used and accepted index in recent literature. Fan and Lang use the sales of companies in primary and secondary industries and benchmark input-output (I-O) tables. We utilize the Compustat database to collect the sales information of companies. The Bureau of Economic Analysis (BEA) publishes the input-output tables every five years. We use the 2002 I-O table, which is the most recently published table at the six digit NAICS code level. Following Fan and Lang (2002), we also analyze the relationship between the integration level and their industry types to provide insight regarding the make-buy decision for sustainability-focused

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companies versus their counterparts pursuing other strategies. The rest of the book chapter is organized as follows. “Reasons for Vertical Integration or Diversification” provides background information on vertical integration, make-buy decisions, transaction cost economics, resource based view, and collaboration in sustainability-focusedorganizational structures. “Vertical Integration Measurement with Fan & Lang Method” describes the methodology of Fan and Lang (2000) for measuring vertical integration index. In “Sample, Data Collection, and Measurement,” after documenting the sample and data sources, we implement our vertical integration measure. “Results” presents the results of the main analysis. “Discussions” discusses possible explanations for the results. “Conclusion” concludes and, finally, “Future Research Directions” presents the future work suggestion.

Vertical Integration Both vertical integration and its absence may cause significant problems for companies. Several researchers have investigated the efficiency and inadequacy of vertical integration compared with contractual relations since the 1970s. Buzzell (1983) and Harrigan (1983) summarize the advantages of vertical integration as •

• • •

• •

BACKGROUND Theoretical and empirical work dedicated to illuminating make-buy or firm-boundary decision, has taken a number of different approaches. Two important perspectives are transaction cost economics (Williamson, 1985; 1991) and the resource-based view (Conner, 1991; Barney, 2001). Both theories focus on different factors to explain make-buy decisions. In this section we will introduce the concepts of vertical integration, transaction cost economics, and the resource-based-view and their implementations on sustainability-focused strategies. Then we will explain how these concepts may be useful in thinking about environmental strategies; we will point out mainly the studies of Coase (1937), Williamson (1985), and Barney (1991).

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•

Reduced transaction costs (e.g. price shopping, communicating design details, negotiating contracts) Power to guarantee supplies Improved coordination of activities Irreplicable products (e.g. superior service levels, customized development of special products) Advanced technological capability (because of increased innovation) Higher entry barriers to the market (i.e. improved marketing intelligence, product differentiation advantages, cost or demand forecast capability) Pursuing sustainability-focused corporate strategies successfully (natural-resourcebased view and transaction cost economics theories will be discussed in “ResourceBased View” and “Transaction Cost Economics”)

as opposed to the disadvantages, such as • • • •

Capital requirements Unbalanced throughput Reduced flexibility Loss of specialization.

These advantages, disadvantages, and definitions in Table 1 summarize the importance of vertical integration with respect to an organization’s strategic decisions related to production, sourcing, and technology management. In addition to these


Table 1. Definitions of Vertical Integration Author(s), Year

Definitions of Vertical Integration

Porter (1980)

“the combination of technologically distinct production, distribution, selling and/or other economic processes within the confines of a single firm. As such, it represents a decision by the firm to utilize internal or administrative transactions rather than market transaction to accomplish its economic purposes.”

Maddigan (1981)

“describes the firm’s strategy of exercising ownership control in the production of products that are used as inputs to each other.”

Buzzell (1983)

“the combination of two or more stages of production or distribution (or both) under a single ownership.”

Riordan (1990)

“the organization of two successive production processes by a single firm.”

Chatterjee, Lubatkin, & Schoenecker (1992)

“puts more of one’s eggs in the same basket, it makes the basket stronger, i.e., more able to deal with the economic and competitive forces that threaten it.”

Davies & Morris (1995)

“the decision by the individual firm on whether to organize exchanges internally (within the firm) or externally (in the marketplace)”

Reed, Lajoux, & Marsalese (1995)

“occurs when a company buys a supplier (vertical backward integration) or customer (vertical forward integration) to achieve economies in purchasing or sales/distribution”

Fan & Lang (2000)

“Two businesses are vertically related if one can employ the other’s products or services as input for its own production or supply output as the other’s input.”

definitions, we propose the definition of vertical integration as follows: A firm is classified as vertically integrated if its segments are operating in two or more different industries and the output of one industry segment is used as input by succeeding industry segments. A segment is defined by the Financial Accounting Standards Board (FASB) Statement No. 14 as: “a component of an enterprise engaged in providing a product or service or a group of related products and services primarily to unaffiliated customers (i.e. customers outside the enterprise) for a profit.” As the input-output utilization relationship intensifies, the firm becomes more vertically integrated; in other words, the vertical integration level increases. At the ultimate vertical integration level, the companies perform nearly 100 percent of their activities in their own facilities. We can define the segments as unique locations where the activities take place, such as factory, warehouse, distribution place, and stores.

Reasons for Vertical Integration or Diversification The literature has noted five main reasons concerning sourcing decisions, in other words, why

companies may prefer to purchase a product or service via the market. Firstly, the nature of the product may affect the vertical integration level since some products require a broad range of knowledge and capabilities to design and produce the sub-components. Secondly, organizational culture may affect the vertical integration level. There is some evidence that competitive forces may change the organizational culture over a long period of time. Two examples of evidence can be given from the computer industry. As a first example, Fine and Whitney (1996) discuss the integration level differences between Japanese and American companies due to the differences in their organization cultures. From the early 1970s through the early 1980s, the computer industry had a strong vertical structure. IBM was dominant in this industry. Since IBM had to maintain its position in a very broad range of industries, it was hard to compete with its rivals. As a result, decisions such as outsourcing some components and the operating system to Intel and Microsoft changed the industry dramatically to a horizontal structure. Since the mid 1980s, the computer industry has had a horizontal structure instead of a vertical

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industry. However, this structure still may be unstable, because some of the companies, such as Microsoft and Intel, still tend to use their market power to expand vertically (Fine & Whitney, 1996). A second example of how organization culture may affect the vertical integration level relates to the decisions of vertical integration in the disk drive industry (Christensen, 1994). IBM, Control Data, Storage Technology, and Century Data were extensively vertically integrated into the design and production of most of the components and dominated the industry from 1956 to 1985. In the 1980s, non-integrated entrant firms such as Seagate, Conner, and Quantum designed drives in-house but purchased standard components from the outside and assembled them. Christensen (1994) finds that disintegration will occur with component and design standardization. In component standardization, several components are replaced by a single component that can perform the functions of all of them (Perera et al., 1999). The integration level of an industry may change as a result of the affects of technology on the degree of modularity in design. Christensen (1994) states that scale economy, the reduction in unit cost as the size of a facility or scale increases, is another driving force of vertical integration of industries. Thirdly, several theoretical studies have shown that macroeconomic factors affect make-buy decisions of companies. Advanced economies have a variety of intermediating institutions in place to address imperfections in the product, labor, and capital markets such as information asymmetries, imperfect contract enforcement, and the inability to enforce property rights. Because these problems are very costly, firms are expected to be more vertically integrated in less developed countries (Khanna and Palepu, 1997; 2000). Moreover, the instability of certain industries may affect the diversification of companies. Diversification and the level of vertical integration present in the computer industry changed over a period of time as a result of changes in the level of competition within the industry. Results of Chatterjee et al. (1992) sug-

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gest that vertically integrated companies “may be effective at lowering the sensitivity of a firm’s returns to macro-environmental disturbances.” In addition to these first three reasons, the make-buy decisions are also determined by market conditions. Arya et al. (2008) examined a case when a monopolistic supplier serves both the firm and its competitor. They demonstrated that if a company produces in its own facilities then its competitor is going to be the only customer of the monopolistic supplier and the supplier will deliver the input to the competitor on desirable conditions. Therefore, even though it is costly to buy from suppliers, under such a condition companies prefer not to produce the inputs internally. Veloso and Fixson (2001) examined the economic incentives and constraints and they claimed that the competition among the assemblers and complexity of the components affect the make-buy decisions of automotive assemblers. They noted that in the case of outside market inexistence, integration is the best solution. Researchers showed that the vertical integration level can also be stimulated by fluctuations in demand by assuming the existence of market imperfections (Carlton, 1979; Lieberman, 1991) Finally, the dynamics of the company also influence vertical integration policy. The model developed by Balakrishnan (1994) demonstrates that “changes in profitability, technological innovation, and costs for assets regarding to these changes” shape the make-buy decisions in the company.

Resource-Based View The origins of the resource-based view theory can be dated back to earlier works of Penrose (1959). The resource-based view (RBV) theory explores the firms’ performance from the resources and their implementation side rather than in terms of the products side (Rumelt, 1984; Wernerfelt, 1984). Barney (1991, p. 101), referring to Daft (1983), defines firm resources as “all assets, capabilities,


organizational processes, firm attributes, organizational processes, firm attributes, information, and knowledge.” According to Barney (1991), the firm resources that hold the potential advantage of sustained competitive advantage must have the following characteristics: •

• •

•

Valuable: the resources must enable firms to develop strategies to improve its efficiency and promote opportunities Rare: the resources must be rare to be advantageous in the competitive environment Inimitable: if the resources are duplicated by the competitors, firms cannot maintain the competitive advantage Non-substitutable: using different resources, the competitors should not be able to implement the same strategies, but in a different way

These attributes are the requirements for a firm resource to be a source of sustained competitive advantage. In his empirical study, Gulbrandsen et al. (2009) found positive relation with a firm’s knowledge and skills, which are present and necessary for integrating suppliers’ activities into its own activities (i.e. RBV theory), and the vertical integration decision of companies. The resource-based view provides insights on both organizational and strategic side of the firm. Within the field of sustainability studies, naturalresource-based-view researchers categorize the resources and capabilities that yield competitive advantage will be discussed in the next section.

Natural-Resource-Based View It is usually expected that companies buy an input if its price is higher than its in-house production cost. However, the make-buy decisions can be more difficult under some conditions. One of these conditions is having a vertically-integrated corporate strategy. Concerns of Sustainability Focused Companies (SFCs) about strategic competi-

tiveness may revoke these customary commerce habits. The vertical-integration-level analysis for SFCs contributes to both the vertical integration and sustainability literatures, which is mainly related to answering the following question: “Do the sustainability-focused companies have a higher vertical integration level than their counterparts which are not pursuing a sustainability-focused strategy?” A tremendous amount of research has been accomplished about the connection between firm strategies and the vertical integration level. Unfortunately, none of the scholars examined the vertical integration level of sustainability-focused companies with any developed vertical integration measures. There is literature that discusses the benefits of integration, particularly for sustainability-focused companies. Hart (1995) makes natural-resourcebased view arguments for vertical integration and proposes that corporate environmental management is a strategic resource that can produce competitive advantage and progress towards more sustainable production which takes place in three phases: pollution prevention, product stewardship, and sustainable development. These three phases are interconnected and support each other. Especially, the firms that demonstrate capability in tacit skills (e.g. TQM), socially complex skills (e.g. cross-functional management), and rare skills (e.g. shared vision) will be successful in pollution prevention, product stewardship, and sustainable development respectively. The natural resources that contribute to the competitive advantage are assumed to be difficult to replicate because they are rare and/or specific to a given firm (Reed and Defillippi, 1990; Barney, 1991), tacit (causally ambiguous) or socially complex (Teece, 1982; Winter, 1987). Carter and Rogers (2008) concluded in their literature review study that the product of SFCs may be more difficult to imitate. From a resource-based view perspective, these arguments point toward vertical integration. The natural-resource-based view arguments of Hart (1995) were tested by Menguc and Ozanne

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(2005) as to whether firm performance is related with the capabilities of corporate social responsibility and commitment to the natural environment. They argued that these capabilities are rare, valuable, and difficult to imitate. Thus, successful implementation should lead to higher profit and market share. Aragon-Correa (2003) noted that companies need to recognize and evaluate particular organizational and human resources, in addition to particular organizational capabilities that will create environmental advantages. Also, sustainable development will extend beyond the firm with collaboration skills (such as technology cooperation) among the public and private companies. Russo and Fouts (1997) provided an empirical test of resource-based view theory and applied to environmental social responsibility using firm-level data on environmental performance and profits. The authors found that companies reporting superior environmental performance also had superior financial performance, a result that can be interpreted as being consistent with the resource-based view theory. According to Seuring and Muller (2008), green supply chain has to be integrated from raw materials to final customers to ensure the quality of products and the performance of processes. Seuring and Muller (2008) defines sustainable supply chain management as “the management of material, information and capital flows as well as cooperation among companies along the supply chain while taking goals from all three dimensions of sustainable development, i.e., economic, environmental and social, into account which are derived from customer and stakeholder requirements.” (p. 1700) Similarly, vertically-integrated systems are advantageous compared to the contractual relations and market bargaining because of their potential for coordinated adaptation to changes in external factors. Organization structure at vertically-integrated organizations allows them

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to focus all of the energies of their segments on the same goals and strategies since they share same mission, hierarchy, and quality standards (Robinson and Casalino, 1996). Harrigan (1983) states that vertical integration assures irreplicable differentiation advantages such as superior service levels, coordination of raw material qualities, and customized development of special products. Additionally, Carter and Rogers (2008) concluded in their literature review that the product of SFCs may be more difficult to imitate. Chan (2005) proposes a model that illustrates the antecedents and results of natural-resourcebased-view approach by conducting a survey to foreign invested companies located in China. His analysis demonstrates; firstly, resource-basedview approach leads company to develop higher organizational capabilities, secondly, companies that have these capabilities are more likely to adopt sustainability-focused strategies, and consequently, the adoption of sustainability-focused strategies leads to achieve higher environmental and financial performance.

Transaction Cost Economics During the early 1970s, the economists began to promote the theory of transaction cost economics from the earlier work of 1991 Economy Nobel Prize winner Ronald H. Coase. Especially, Oliver Williamson fully developed this theory with his remarkable contributions over the last four decades and he was also awarded with the Economy Nobel Prize2 in 2009. The seminal studies that argue transaction cost economics include Calabresi (1968), Williamson (1975), Goldberg (1976), Klein et al. (1978), and Dahlman (1979). Transaction cost analysis is defined by Williamson (1985) as follows: “Transaction cost analysis supplants the usual preoccupation with technology and steady-state production (or distribution) expenses with an examination of the comparative costs of planning,


adapting, and monitoring task completion under alternative governance structures.” (p. 2) Coase (1937) noted that the transaction cost economics forms the boundary of the firm. Some transaction costs may not be handled in the market; therefore, firms may need to increase vertical integration level to undertake these transaction costs. Williamson (1996) defines the transaction costs as “the ex ante costs of drafting, negotiating and safeguarding an agreement and, more especially, the ex post costs of maladaption and adjustments that arise when contract execution is misaligned as a result of gaps, errors, omissions, and unanticipated disturbances” (p. 379). Hence, these types of costs have influence on outsourcing decisions and the success of outsourcing depends on the managing outsourcing relationships. Transaction costs may be external if firm outsource its inputs or may be internal if firm produces its inputs. According to the TCE theory, firms should be vertically integrated when their external governance costs are larger than the costs of producing in firms’ own facilities (Gulbrandsen, 2009). Transaction cost economics assumes that people may not be truthful and honest about their contracts to take advantage of some circumstances in the market (i.e. opportunism assumption – limitations on information and restriction to process) and may not foresee all possible results due to existence of uncertainties (i.e. bounded rationality assumption) in transactions (Williamson, 1975; 1985). Acemoglu et al. (2009) found that companies are more vertically integrated in some developing countries which have high contracting costs. Asset specificity is the also another important concept in TCE theory and refers to “durable investments that are undertaken in support of particular transactions’’ (Williamson, 1985, p. 55). According to TCE theory, asset specificity is one of the fundamental factors that determine the vertical integration strategy of the firm (Williamson, 1985). Asset specificity is frequently discussed

with empirical studies and some of these studies support that asset specificity is positively correlated with the vertical integration level (Joskow, 1988; Mahoney, 1992; Whyte, 1994; Shelanski and Klein, 1995; Rindfleisch and Heide, 1997; Gulbrandsen et al., 2009). Also, a negative correlation was determined in the study of Kvaløy (2007). Although, there is not many application of transaction cost economics theory in the sustainability literature, we will present some examples in the following section.

Natural Transaction Cost Economics Limited number of researches was conducted on the intersection of sustainability-focused strategies and transaction cost analysis. For example, the empirical study of Rosen et al. (2001) confirms that, in computer industry, SFCs were more likely to specify a role for third parties to help with conflict resolution in contracting and recognize and express concern about potential “expropriation and shirking” risks. The problem in contracts may be a reason for internationalization of production. In other words, SFCs will tend to reduce transaction costs of contracting by vertical integration (Rao, 2003). Carter and Carter (1998) examined the effect of vertical coordination between buyers and suppliers to environmental purchasing activities with conducting a survey to managers and they observed that the greater the vertical coordination between suppliers and buyers supports the environmental purchasing activities. Additionally, they detected that as manufacturers use environmentally friendly input they become more vertically integrated with their suppliers. Finon and Perez (2007) explore the efficiency of the regulatory instruments used to encourage renewable energy sources in electricity generation. They argued that governments coordinate renewable energy sources more effectively with long-term contracting and explained the main goal of this contractual format as supplying long-

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term guaranteed support to encourage investors. Using transaction costs economics, Delmas and Marcus (2004) compare the economic efficiency of firm-agency governance systems for pollution prevention. They note that the choice of governance system depends on the strategies (e.g. sustainability-focused strategies) firms pursue. Natural-resource-based view and naturaltransaction-cost-economics theories propose sustainability-focused companies to increase vertical integration level. On the other hand, collaboration in sustainable supply chains is another way that leads company to successfully pursuing sustainability practices.

Collaboration in Sustainable Supply Chain Firms may prefer buying outside or producing in house. Literature indicates that collaboration is very important in sustainable supply chains as an alternative to the vertical integration. Collaboration with suppliers may facilitate the implementing and managing sustainable supply chains (Green et al., 1996; Lamming and Hampson, 1996; Vachon and Klassen, 2008). In cooperative customersupplier relationships, companies plan and design their products and processes for the purpose of reducing the impact to the environment (Noci, 1997). Environmental collaboration is defined by Vachon and Klassen (2008) as follows: “the direct involvement of an organization with its suppliers and customers in planning jointly for environmental management and environmental solutions” (p. 301). Noci (1997) developed a green vendor rating system that includes supplier selection procedure to help developing proactive sustainable strategies. Bowen et al. (2001) conluded that capabilities in sustainable supply chains are developed by a proactive corporate-environmental approach and collaboration is one of the important capabilities

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that predict the green supply behavior. Managers can develop these capabilities to help fostering sustainability practices. Klassen and Vachon (2003) assessed the customer- and plant-initiated collaboration in Canadian sustainable businesses. They found that as the companies increase customer-initiated collaboration, managers prefer to make investments towards preventing environmental pollution. In other words, collaboration in sustainable supply chain affects both the level and form of investment in environmental technologies. The summary of the literature review was illustrated in Figure 1. In “Vertical Integration Measurement with Fan & Lang Method,” we will continue with introducing Fan & Lang’s vertical integration measurement method and its implementations.

VERTICAL INTEGRATION MEASUREMENT WITH FAN & LANG METHOD Lemelin (1982) uses input-output tables for measuring industry relatedness to consider patterns of diversification. Fan and Lang (2000) extended this study to construct alternative measures of relatedness. In this study, we will follow Fan and Lang’s (2000) method which provides us detailed information of vertical integration calculation at both the industry and firm levels. They state that two industries are vertically related if one industry uses the other’s output as its input. Fan and Lang (2000) developed vertical relatedness and complementarity variables as interindustry and intersegment measures based on I-O tables. At the industry level, they show that the proposed inputoutput-based vertical relatedness and complementarity measures provide better description of firms’ relatedness than previously generated SIC-based measures. The use of SIC based measures has been widely criticized by various researchers (Nayyar, 1992; Farjoun, 1994; Robins and Wiersema, 1995; Silverman, 1999; Fan and Lang, 2000). Fan and


Figure 1. The summary of the literature review

Lang (2000) examine the relatedness patterns of U.S. firms between 1979 and 1997 and report an increasing trend at the vertical integration level of firms over time.3 Early application of Fan & Lang’s method include Claessens et al. (2001). This study employed Fan and Lang’s (2000) vertical relatedness and complementarity variable measures to a sample of over 10,000 firms in nine East Asian economies to examine the patterns of vertical relatedness and complementarity of diversified firms’ business segments. This study sheds light on the differences and changes in the diversification of the eight East Asian countries, Japan, and the United States besides examining the influence of diversification types on corporate value. Additionally, in Claessens et al. (2003), they examine the impact of corporate diversification on productivity and performance. Schildt et al. (2005) used Fan and

Lang’s (2000) method to examine the effect of downstream vertical integration on explorative versus exploitative learning outcomes from external corporate ventures. Rondi and Vannoni (2005) used forward and backward integration measures and Italian I-O tables to test the effects of competitive pressure on product diversification and refocus on core business strategies of 108 diversified European Union (E.U.) manufacturing leaders that faced the E.U. integration shock. Recent studies using the method include Fan and Goyal (2006), who measure vertical relations in a large sample of mergers between 1962 and 1996. Fukui and Ushijima (2007) investigate the industry diversification of the largest Japanese manufacturers. Hendricks et al. (2009) examine whether business diversification and vertical relatedness influence the stock market reaction to supply chain disruptions. Hutzschenreuter and

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Guenther (2008) analyzed the expansion steps of firms and the way of reaching their level of diversity. Hutzschenreuter and Guenther (2009) examine the factors that have impacts on a firm’s rate of expansion and the major sources of complexity that are associated with managing and expanding assets. Hutzschenreuter and Gröne (2009) assessed the influence of foreign competition on vertical integration strategies of U.S. and German companies. They used the value-added-to-sales approach of Adelman (1955), adjusted value-added-to-sales ratios developed by Buzzel (1983) and Tucker & Wilder (1977), and Fan & Lang (2000) methods in their analyses. They compared these methods and concluded that input-output based method of Fan & Lang is more advantageous than the other value-added-to-sales based methods. Acemoglu et al. (2009) explores the main effects of financial development and contracting costs on the vertical integration level across 750,000 firms in 93 countries.

SAMPLE, DATA COLLECTION, AND MEASUREMENT Sample Our sample was drawn from the union of three firm sets. The first set is the “Dow Jones Sustainability United States Index” and consists of 116 U.S. firms. These firms integrate long-term economic, environmental, and social aspects into their business strategies. A sustainabilityfocused strategy increases long-term shareholder value and sustainable companies show superior financial performance (Russo and Fouts, 1997; Schaltegger and Synnestvedt, 2002; Filbeck and Gorman, 2004; Claver et al., 2007); consequently, Dow Jones Indexes, STOXX Limited, and SAM Group launched the Dow Jones Sustainability Index (DJSI) to quantify the firms’ economic, environmental and social developments to assess their strategic and management performance.

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This index is reviewed with a questionnaire annually to ensure that it represents the leading sustainable companies. This index also utilizes information from the company documents, such as, sustainability, environmental, social, financial, and health-safety reports. Appendix A-1 presents the set of criteria and weightings that is used to assess the economic, environmental, and social aspects of the companies. The second set is the “The Global 100 Most Sustainable Corporations” list which has been compiled by the Corporate Knights magazine since 2005. After eliminating overlaps, we obtained 38 companies by combining 2005-2009 lists. The aim of this list is to emphasize the global firms which are successful in managing environmental, social, and governance issues. The annual list of Global 100 is announced each year during the World Economic Forum in Davos. The performance indicators that are developed by Corporate Knights Research Group are given in Appendix A-2. Corporate Knights examine the 300 companies, which are the top 10% of 3000 developed and emerging market stocks, based on these indicators. The Global Sustainability Research Alliance compiles the economic, social, and governance performance indicators from ASSET4, a Thomson Reuters business, The Bloomberg Professional, and FactSet Research Systems databases. The third set, “SB20: The World’s Top Sustainable Business Stocks,” has been created by Progressive Investor for 9 years. We eliminated the overlapping companies and obtained 23 sustainable businesses in the combined list. Progressive Investor is a monthly and online investing newsletter that provides financial information about leading green companies and instructs investors about all green funds. The newsletter works with a group of judges, who are stock analysts, to select, nominate, and discuss companies. The SB20 list includes various sizes of companies and these companies must be competitive based on both the sustainability and financial strategies to be in the set. The criteria for the list are not announced in


detail; however, they are accumulated under two main categories, environmental and financial criteria. Companies should make announcements and progress in meeting objectives, have advanced green technologies, and lead society to a sustainable future. Financial criteria evaluate the profitability of the companies and expect strong management skills and balance sheet. We compiled our sample from U.S. companies. There are two main reasons; first, we eliminated the country effect (Acemoglu, 2009) on vertical integration, second, we used only the I-O tables for the U.S. Since all three lists have similar criteria, we combined these lists and finally get 144 companies. However, information for some companies is not available in our databases (see Appendix B for the list of the sustainable firms). Additionally, the vertical integration level of companies, which are operating mainly in retail, transportation, and warehousing industries, cannot be calculated because I-O tables do not provide detailed information for these industries. We assume that the companies that are listed in these sets are successful in pursuing and/or monitoring sustainability activities. The list of non-sustainable companies is not available; hence, we assume that the companies that are not listed in these sets are not pursuing and/or monitoring sustainability activities as much successful as listed companies. In this study, a non-sustainability company comparison set was generated by looking at the competitors that are similar to sustainable companies with regards to financial indicators, products, and operations. We utilized Hoover and Mergent Online databases to obtain these “so-called” nonsustainable companies as these databases report the competitors for each North American Industry Classification System (NAICS) code. Bhojraj et al. (2003) discusses the historical development, intent, and basic philosophy behind the SIC and NAICS codes. DJSI United States categorizes companies under 10 industries. After excluding Telecommunications industry, which has only one company, we categorize all sustainable compa-

nies and their competitors within nine industries. In the next section, we will mention other data sources in detail.

Data Collection The Fan & Lang (2000) method utilizes inputoutput (I-O) tables to calculate vertical integration level. The Bureau of Economic Analysis (BEA), which is an agency of the Department of Commerce, publishes the benchmark I-O tables every five years. BEA estimates industry and commodity outputs for the I-O make and use tables. The input-output tables report the dollar value of each input used to produce the output of more than 400 different industries in the U.S. economy. Make-use tables provide a comprehensive picture of economy and show the relationships between industries and commodities. Many economists, analysts, and policymakers use I-O tables in their analyses. These tables mimic the 6 digit NAICS codes; however, there are aggregations of some NAICS codes. This research will use 2002 I-O tables which are the latest available data set, because data for 2007 was not publicly available at the time this chapter was written. Stewart et al. (2007) discusses the preparation of the 2002 I-O tables. They explain the utilization and the concepts of make-use tables and illustrate the methods underlying the I-O tables in detail. Standard & Poor’s Compustat Industry Segment database provides financial, statistical, and marketing information of companies that represent at least 10 percent of a firm’s sales, assets, or profits. Disclosure of data in this database is required by the Securities and Exchange Commission of the United States Government. This database is used extensively by the researchers who apply Fan & Lang’s method. Compustat database compiles the industry information from firms’ annual reports and 10-K reports that are reported to the Securities and Exchange Commission. In addition to a firm’s financial data, Compustat assigns a 4 digit

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SIC code and 6 digit NAICS code according to the industry in which that segment operates. Beginning from December 15, 1977, public firms are required to disclose the industry segment information if the segment’s account is more than 10% of their total sales, profits, or assets, because of the Financial Accounting Standards Board’s (FASB) statement number 14. For some companies, this may cause a problem of disclosing segment-level information for over 10 segments (i.e. a limitation of Compustat stated in Villalonga (2004)). In our study, the maximum number of segments is 6; therefore, this problem does not affect our study. Next section explains step-by-step how to apply Fan & Lang’s method to calculate vertical integration level of companies. We used same the same notation with Fan & Lang (2000) to not to confuse reader.

Measuring Step-by-Step Vertical Integration with Fan & Lang Method The benchmark input-output tables4 report the dollar value of industry i’s output used to produce the output of industry j and this is denoted by Fan and Lang as aij. We divide aij to the industry j’s total output to get vij, interpreted as “the dollar value of industry i’s output required to produce 1 dollar’s worth of industry j’s output”. In an opposite manner, we find the values of aji and vji. Moreover, we find the Vij (relatedness coefficient) which is the average of vij and vji and represents “the proxy for the opportunity for vertical integration between industries i and j” (Fan & Lang, 2000, p. 633). The vertical integration level is defined as; V = ∑ (w jVij ) j

where wj is the ratio of j th secondary segment sales to the total sales of all secondary segments (sales weight of secondary industries). This formulation

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tells how and to what degree the primary and secondary firm segments are related. Appendix C illustrates the data and calculation of vertical integration index for H&R Block, Inc., which has subsidiaries at Tax Services, Mortgage Services, Business Services, and Investment Services. Primary segment of this company is “Tax Services” because it has the highest amount of sale for H&R Block, Inc. For “Mortgage Services” segment • • • •

•

• •

NAICS code is 522292, which is shown as 522A00 in 2002 I-O table Sale of H&R Block, Inc. in this industry is 1,150 M$ Total sale of “Mortgage Services” industry is 206,138 M$ The output of “Tax Services” industry required to produce the output of “Mortgage Services” industry, aij is 208 M$ The output of industry “Mortgage Services” required to produce the output of “Tax Services” industry, aji is 279.9 M$ vij, vji, and their averages Vij are 0.001, 0.003, and 0.00189 respectively Finally, 0.0019 is the vertical integration level V which is obtained by the multiplication of Vij value of secondary industry with its corresponding sale weight, wj

RESULTS We have used Wilcoxon Rank Sum Test (a.k.a Mann-Whitney U test) for comparing sustainable companies and their competitors that are not listed as sustainable companies. The residual analysis does not confirm the normality assumption; therefore, we preferred to use this nonparametric test. Nonparametric statistics are preferred when analysis does not depend on any population fitting to distribution methods. In our analysis, vertical integration level is considered as the dependent, response or outcome variable, and the “strategy” is the independent or factor variable.


According to our analysis, we observed significant differences in vertical integration levels for Health Care and Industrials industries. For α = 0.05, sustainable companies in Health Care and Industrials industries present higher vertical integration level than their non-sustainable counterparts do. On the other hand, we could not state a significant difference in the vertical integration level for other seven industries. Table 2 presents the p-values associated to each industry with descriptive statistics that are calculated with Wilcoxon Rank Sum Test. Both Basic Materials and Oil & Gas industries present higher level of vertical integration for sustainable and non-sustainable companies. On the contrary, the vertical integration level of Consumer Goods and Consumer Services industries are quite low for both sustainable and nonsustainable companies. Most of the companies have zero vertical integration level because they operate generally in only one industry. Because I-O tables do not provide information for these industries, we have to omit retail, transportation, and warehousing industries in our calculations. This is also another reason for obtaining zero vertical integration level. In Consumer Goods and Consumer Services industries, most of the companies have distribution and transportation segments that we cannot consider in our calculations. The vertical integration level in Technology industry is low for both sustainable and non-sustainable companies. As noted in Fine & Whitney (1996), these computer and software companies started to be disintegrated starting from mid 1980s because of the product and industry conditions. Therefore, this low vertical integration level is due to industry and product effects. Fan & Lang (2000) also observed a high vertical integration level in Chemical industry (i.e. Basic Materials industry). Therefore, the high vertical integration level of sustainable and non-sustainable companies in Basic Materials industry may be because of the industry effect as well.

At first glance, since we were expecting higher vertical integration level for sustainable companies in more industries, the result of the study is surprising given that the literature hypothesize a higher level of vertical integration for sustainable companies. However, we understand that, the effect of industry and product on vertical integration level cannot be negligible. The results of this study do not conflict with literature; contrarily, it supports both the scholars that emphasize the factors affecting make-buy decisions and the scholars that propose higher integration for sustainable companies. In the next section, we present more discussion on the Fan & Lang method and data sources.

DISCUSSIONS Our analysis has some limitations that deserve further research. Fan & Lang’s method is an I-O based vertical measurement index. Because of limited information in I-O tables, this method could not calculate the vertical integration level of some companies that are operating mainly in retail, transportation, and warehousing industries. In a parallel study we evaluated the I-O based vertical integration measures and concluded that Fan & Lang’s method is a preferable method compared to other methods, Davies and Morris (1995) and Hortacsu and Syverson (2009). There are other vertical integration measurement methods that are not I-O based. However, Hutzschenreuter & Gröne (2009) assessed the influence of foreign competition on vertical integration strategies of U.S. and German companies. They used the value-added to sales approach of Adelman (1955), adjusted value-added to sales ratios developed by Buzzel (1983) and Tucker and Wilder (1977), and Fan and Lang (2000) methods in their analyses. They compared these methods and concluded that the input-output based Fan and Lang method is more advantageous than the other value-added-to-sales based methods.

371

372

P value

Count

Maximum

Minimum

Range

Sample Variance

Standard Deviation

Median

Mean

Sample Size (n)

0.0030

Sustainable

0.423

6 6

Sustainable

0.1812

Non-Sustainable

Non-Sustainable

0.1207

Sustainable

0

0.1812

Non-Sustainable

Non-Sustainable

0.1177

0.0746

Non-Sustainable

Sustainable

0.0464

Sustainable 0.0027

0.0084

Non-Sustainable

0.0056

0.0168

Sustainable

Sustainable

0.0501

Non-Sustainable

0.0393

Non-Sustainable

6

Non-Sustainable

Sustainable

6

Basic Materials

Sustainable

Industry Strategy

Table 2. Summary of results

0.800

15

15

0.0465

0.0497

0

0

0.0465

0.0497

0.0002

0.0003

0.0119

0.0172

0.0051

0.0005

0.0077

0.0099

15

15

Consumer Goods

0.728

19

19

0.3935

0.3144

0

0

0.3935

0.3144

0.0105

0.0087

0.1024

0.0932

0

0

0.0378

0.0322

19

19

Consumer Services

0.426

13

13

0.1965

0.2236

0

0

0.1965

0.2236

0.0044

0.0034

0.0660

0.0581

0.0505

0.0505

0.0611

0.0579

13

13

Financials 15

15

0.042*

15

15

0.0204

0.1022

0

0

0.0204

0.1022

2.42E-05

0.0012

0.0050

0.0351

0.0023

0.0199

0.0044

0.0296

Health Care

0.029*

18

18

0.0222

0.0641

0

0

0.0222

0.06411

6.82E-05

0.0004

0.0083

0.0197

0.0023

0.0125

0.0065

0.0190

18

18

Industrials

0.894

9

9

0.4097

0.4097

0

0.0010

0.4097

0.4088

0.0171

0.0303

0.1308

0.1740

0.0370

0.0230

0.0805

0.1177

9

9

Oil & Gas

0.101

15

15

0.0403

0.0625

0

0

0.0403

0.0625

0.0002

0.0004

0.0134

0.0186

0

0.0099

0.0068

0.0148

15

15

Technology

0.148

11

11

0.0721

0.0137

0

0

0.0721

0.0137

0.0005

1.87-05

0.0230

0.0043

0.0005

0.0022

0.0102

0.0041

11

11

Utilities



The Compustat database is widely used by researchers who apply Fan & Lang’s method in their analysis. However, Compustat database is not always consistent with the other databases (e.g. Hoover or Mergent Online) or annual reports of the companies because the companies do not announce all the industries in which they operate. This limitation makes it impossible to calculate vertical integration for undeclared subsidiaries. On the other hand, only public companies have to declare the segments and segment sales correctly. The data about the private companies may not be accurate and this limitation may cause incorrect calculations. In this study, the sample is composed of public companies; additionally, we made crosschecked with the other databases and completed the missing data from the Hoover industry reports and Mergent Online database. The Fan & Lang’s method measures the relationship between the primary and the other segments of the company. The primary segment is defined as the segment which has the highest sales; the relationship between the primary segment and others is weighted according to the sales of other segments. Acemoglu et al. (2009) modified Fan & Lang’s method, used equal weights for each segment, and examined the relationship between all segments. As explained in the data section, Compustat data is limited with 10 segments and this causes inaccurate vertical integration calculation for the companies which are operating in more than 10 different segments. Other concerns about the Compustat database are related to the definition of segment itself. Because of the ambiguity in definition, some firms may disclose the segments as an aggregation of a couple of unrelated segments (Davis and Duhaime, 1992). Furthermore, they may change the segments and number of segments in their disclosed reports even if there is no change in their operations (Denis et al., 1997). This may cause incorrect allocation of industries to firms. The Compustat database compiles the segment information on public companies traded on NYSE,

ASE, NASDAQ, and OTC. Therefore, we can say that Compustat limits the sample to publicly traded companies. Additional concerns about the Compustat database can be found in Davis and Duhaime (1992), Denis, Denis, & Sarin (1997), and Villalonga (2004).

CONCLUSION This study compared the vertical integration level of sustainable and non-sustainable companies. Literature of natural-resource-based view (e.g. Hart (1995) and Russo & Fouts (1997)) and natural-transaction-cost-economics theory (e.g. Carter & Carter (1998) and Finon & Perez (2007)) propose increasing the vertical integration level for sustainable companies. Carter and Carter (1998) measured the vertical coordination through the supply chain with a survey and concluded that vertical integration increase the environmental performance of the companies. In the literature, the linkage between environmental strategies and vertical integration has not been examined with an economy-based vertical integration index. This study attempts to fill this gap by measuring the vertical integration with Fan & Lang’s method and trying to understand if the sustainable companies tend to be more vertically integrated than their non-sustainable counterparts. The results demonstrate that sustainability-focused companies in the Health Care and Industrials industries tend to have more vertically integrated organizational structures than their industry non-sustainable competitors. There was no significant difference in the vertical integration level of sustainability-focused versus non-sustainability-focused companies for the other seven industries studied. Higher vertical integration may not be possible under some industry, product, market, and economic conditions. Under these circumstances, sustainable companies may prefer to increase the social capital with its suppliers to eliminate the effect of disintegration. Enlarging their social

373


network and developing relationships will be discussed in “future research directions” section.

FUTURE RESEARCH DIRECTIONS Several methods for measuring vertical integration exist; however, all of these methods rely exclusively on economic data. Employing social network analysis, a possible future study may examine the collaboration of sustainability-focused companies with their suppliers to understand the supply chain coordination that helps fostering knowledge transfer and organizational performance. Possible future studies can be: 1. Defining the social ties between sustainability-focused companies and their first and second tier suppliers to understand if they have an organizational structure that is a substitute (or at least complementary) to a pure vertically-integrated organizational structure. 2. Examining the evolution of supply chain structure as an organization becomes more socially and environmentally aware.

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KEY TERMS AND DEFINITIONS Environmental collaboration: Working together with customers or suppliers to plan environmental activities in a sustainable supply chain for better performance. Green Logistics and Supply Chain Management: Network of interconnected businesses that are pursuing strategies for being responsible to environment. Natural-Resource-Based View: Analyses of the resources which are valuable, rare, inimitable, non-substitutable, and affect the environmental performance of the firms. Natural-Transaction-Cost Analysis: Examination of transaction costs that affect the environmental performance of sustainable businesses.

Resource Based View: Determines the resources which are effective on the competitive advantages of firms. Transaction costs: Costs which are occurred in an economic exchange and represents the cost of planning, adapting, and monitoring task completion. Vertical Integration: A firm is classified as vertically integrated if its segments are operating in two or more different industries and the output of one industry segment is used as input by succeeding industry segments. Vertical Integration Measurement: Measuring vertical integration level with input-outputtables or financial-accounts based indices.

ENDNOTES 1

2

3

4

“The Staying Power of Sustainability: Balancing Opportunity and Risk in the Hospitality Industry,” Deloitte, 2008. http://nobelprize.org/nobel_prizes/economics/laureates/2009/press.html The data set of Fan & Lang (2002) is available from Prof. Joseph P.H. Fan’s personal website: http://ihome.cuhk.edu.hk/~b109671/ relatedness.htm. Various researchers used Fan and Lang’s IO-SIC conversion tables in their analyses (e.g. see Kale and Shahrur, 2007; Raman and Shahrur, 2008) The complete sets of Bureau of Economic Analysis Benchmark Input-Output 2002 tables are accessible from: http://www.bea. gov/industry/io_benchmark.htm#2002data

381


APPENDIX A-1. Table 3. Criteria and Weightings for Dow Jones Sustainability Index Dimension Economic

Criteria

6.0%

• Corporate Governance

6.0%

• Risk & Crisis Management

Environment

Social

6.0%

• Industry Specific Criteria

Depends on Industry

• Environmental Reporting*

3.0%

• Industry Specific Criteria

Depends on Industry

• Corporate Citizenship/ Philanthropy

3.0%

• Labor Practice Indicators

5.0%

• Human Capital Development

5.5%

• Social Reporting*

3.0%

• Talent Attraction & Retention

5.5%

• Industry Specific Criteria *Criteria assessed based on publicly available information Source:http://www.sustainability-index.com/07_htmle/assessment/criteria.html

382

Weighting (%)

• Codes of Conduct / Compliance / Corruption & Bribery

Depends on Industry


APPENDIX A-2. Table 4. Criteria and Weightings for Global 100 Sustainable Company List Dimension Energy Productivity*

Calculation Methodology

Weighting (%)

Â€Â€• US$ sales / Gigajoules of total energy consumed

75%

Â€Â€• Increase in resource productivity equal to or exceeding 6% per annum

25%

Â€Â€• US$ sales / total cubic meters of water consumed

75%


25%

Â€Â€• US$ sales / Metric tonnes of total CO2e emitted

75%


25%

Â€Â€• US$ sales / Metric tonnes of total waste produced

75%

Â€Â€• increase in resource productivity equal to or exceeding 6% per annum

25%

Leadership Diversity

Â€Â€• the percentage of women on the Board of Directors

100%

CEO-to-average worker pay*

Â€Â€• Highest company compensation package in US$ / Average employee compensation in US$

75%

Â€Â€• Average employee compensation calculated as total company compensation / total employees

25%

Â€Â€• (US$ Statutory tax obligation – US$ Cash taxes paid) / US$ Statutory tax obligation

100% of Maximum

Water Productivity* Carbon Productivity* Waste Productivity*

Taxes Paid

Â€Â€• 1-the result in #1 up to a maximum of 100% Sustainability Leadership**

Â€Â€• Binary system with 1 awarded for presence of a sustainability committee within the company and 0 for absence

25%

Â€Â€• Binary system with 1 awarded for presence of at least one Board member on the committee and 0 for absence

75%

Sustainability Pay Link

Â€Â€• Binary system with 1 awarded for at least one Director’s remuneration being linked to extra-financial performance and 0 for absence of a link

100%

Innovation capacity*

Â€Â€• US$ R&D / US$ Sales

100%

Transparency**

Â€Â€• Binary system with 1 awarded for disclosure on a specific data point and 0 for absence for of disclosure. (e.g. total workforce; R&D expenditures, etc.)

50%

Â€Â€• Score of 0 to 1 awarded for level of GRI Adherence and Verification

50%

*Final score (0-1) based on a normalized z-score. **Final score (0-1) based on a weighted average. Source: www.global100.org

383


APPENDIX B. LIST OF SUSTAINABILITY-FOCUSED COMPANIES IN THE SAMPLE Basic Materials Alcoa Inc. Apogee Enterprises Inc. Dow Chemical Co. ◦âŠ¦ DuPont de Nemours & Co. Newmont Mining Corp. Praxair Inc. Consumer Goods Campbell Soup Co. Coca-Cola Co. Eastman Kodak Co. Ford Motor Co. General Mills Inc. H.J. Heinz Co. Herman Miller Inc. Johnson Controls Inc. Kimberly-Clark Corp. Kraft Foods Inc. Nike Inc. PepsiCo Inc. Procter & Gamble Co. Reynolds American Inc. Whirlpool Corp. Consumer Services Chipotle Mexican Grill DeVry Inc. Dun & Bradstreet Corp. Gap Inc. H&R Block Inc. J.C. Penney Co Inc. Kohl’s Corp. Macy’s Inc. Marriott Intl Inc. McDonald’s Corp. McKesson Corp. Pitney Bowes Inc. Safeway Inc. Starbucks Corp. Target Corp. Time Warner Inc.

384

Walgreen Co. Walt Disney Co. Whole Foods Market Inc. Financials Allstate Corp. American International Group Inc. Chubb Corp. Citigroup Inc. NYSE Euronext Goldman Sachs Gr. Inc. JPMorgan Chase & Co. MasterCard Inc. Morgan Stanley Plum Creek Timber Co Inc. ProLogis Travelers Cos Inc. Unum Group Health Care Abbott Laboratories Baxter International Inc. Allergan Inc. Becton Dickinson & Co. Bristol-Myers Squibb Co. Genzyme Corp. Humana Inc. Johnson & Johnson Life Technologies Corp. Medtronic Inc. Merck & Co. Inc. Millipore Corp. Novartis AG Quest Diagnostics Inc. UnitedHealth Group Inc. Industrials Abbott Laboratories Baxter International Inc. Allergan Inc. Becton Dickinson & Co. Bristol-Myers Squibb Co. Genzyme Corp.


Humana Inc. Johnson & Johnson Life Technologies Corp. Medtronic Inc. Merck & Co Inc. Millipore Corp. Novartis AG Quest Diagnostics Inc. UnitedHealth Group Inc. Oil & Gas FMC Technologies Inc. Fuel Tech Inc. ConocoPhillips Inc. Chevron Corp. Noble Corp. Schlumberger Ltd. Hess Corp. Occidental Petroleum Corp. Smith International Inc. Technology Advanced Micro Devices Inc. Applied Materials Inc. Autodesk Inc. Cisco Systems Inc.

Comverge Inc. Dell Inc. First Solar Inc. Google Inc. Hewlett-Packard Co. IBM Corp. Intel Corp. Maxwell Technologies Microsoft Corp. Motorola Inc. Symantec Corp. Utilities Consolidated Edison Inc. Duke Energy Corp. Entergy Corp. Exelon Corp. FPL Group Inc. Ormat Technologies PG&E Corp. Pinnacle West Capital Corp. Progress Energy Inc. Public Service Enterprise Group Inc. Spectra Energy Corp.

385


APPENDIX C. Table 5. Example of Measuring Vertical Integration Level with Fan & Lang Method Company

H&R Block Inc.

386

Segment Name

NAICS

Sale in NAICS (M$)

wj

Total Sales of NAICS

aij

aji

vij

vji

Vij

Tax Services

541200

1,947

Mortgage Services

522A00

1,150

0.6443

206,138

208

279.9

0.001

0.003

0.00189

Business Services

541200

434.1

0.2432

101,089.2

108.5

108.5

0.001

0.001

0.00107

Investment Services

523000

200.8

0.1125

323,927.6

394.7

595.9

0.001

0.006

0.00360

V

0.0019

101,089.2

387

Chapter 20

Green Logistics and Supply Chain Management Darren Prokop University of Alaska Anchorage, USA

ABSTRACT Logistics and supply chain management are an integral part of business activity today. They are crucial drivers of globalization as well. As such, these activities are responsible for a large share of greenhouse gas emissions. In fact, transportation in the United States is the business sector which contributes the most human-generated greenhouse gas emissions. This chapter will discuss the role of logistics and supply chain management in the generation of such pollutants and examine methods to mitigate this byproduct of modern business activity. It will be shown that a series of trade-offs exist which are complex in nature and require careful consideration when confronting environmental concerns.

INTRODUCTION This chapter will lay out the nature of Green activities appropriate to logistics and supply chain management. After defining and differentiating between logistics and supply chain management, transportation will be singled out as a logistical activity crucial to environmental friendliness. Green initiatives will be discussed in the context of how transportation is managed across complex supply chains. There are many trade-offs involved in the artful management of traditional business DOI: 10.4018/978-1-60960-531-5.ch020

goals and environmental friendliness. This chapter will discuss how to identify and deal with these trade-offs. Areas for future research will also be discussed.

WHAT IS LOGISTICS AND SUPPLY CHAIN MANAGEMENT? Logistics is the art and science of dealing with time, space and location. Logistics deals with the flow of inputs, outputs (tangible and intangible), people, information, and financial capital along a supply chain. Logistics adds value from primary


Green Logistics and Supply Chain Management

products all the way to final delivery to the end customer. Logistics is supported by supply chain management which represents the contractual linkage of organizations with a common strategic goal. Metaphorically, logistics involves a flow of blood and oxygen through a physical body which is the supply chain. Logistics involves the procurement of material for the production process; the storage and distribution of inputs and outputs; and the sale of outputs to customers along the supply chain. The logistical activity which is critical to all of these–and the one most likely to generate significant greenhouse gas (GHG) emissions–is transportation. In the United States, the transportation sector, at 34% (in 2007) accounted for the largest share of human-generated carbon dioxide emissions. It grew by about 19% over 1995 to 2007 while growth in emissions from commercial, industrial and residential sources remained flat. Within transportation itself the mode with the biggest share is the passenger car at 34% followed by light-duty trucks (28%), medium and heavy duty trucks (21%), aircraft (9%), rail (3%) and ships (2%) (Transportation Statistics Annual Report; pp. 5-6). People traveling to and from work; transporting passengers for business or pleasure; and hauling cargo for production and sales are, as noted, the largest source of carbon dioxide emissions. This is a result of the reliance on logistics and supply chain management for economic growth and social activities. As companies seek cheaper sources of labor and other resources; strive for higher revenue through expanding into foreign markets; embark on logistical programs such as lean manufacturing and just-in-time purchasing, more transportation will be occurring and over larger expanses.

GREEN INITIATIVES From the Kyoto Protocols to the Copenhagen Accord, the United Nations has been working to

388

set a global standard for the reduction in carbon dioxide emissions. Without a legal authority to impose any sort of rules, the best it can do is to provide political guidance. Of course, to see global emissions drop to some past year’s level, the developed countries would have to cut emissions to a higher degree than developing countries so that the latter can still grow economically (and perhaps socially as well). Developed countries have access to technology and politically-aware populaces which are willing to accept (or at least discuss) taxes, cap-and-trade, and other pollution premiums attached to production. Together they are also the largest source of GHG emissions. But the largest single source of carbon emissions, China, is understandably less willing to be pinned down to any binding and measurable carbon reduction target. The world economic downturn of 2008 only served to strain the discussion further as China wished to see its export engine continue and, indeed, some Western nations switched gears to the pressing concerns of job protection and fiscal stimuli. Fossil fuels are relatively abundant and cheap compared to Green energy technologies. Nonetheless, the Copenhagen Accord of December 2009 did pledge $10 billion in transfers per year for three years from developed to less developed countries in order to assist with carbon dioxide reductions. And China agreed to reduce its level of carbon intensity (as a proportion of product outputs) by 40-45% by 2020 (The Economist. p. 43). At this point in time, Green energy sources (e.g., solar and wind) are not as efficient as fossil fuels because they cannot facilitate the same level of production. This is a research and development problem. And switching a portion of the production process over to Green energy technology would just serve to raise costs at this point. Why would a firm do so at this stage? Environmental sustainability, eco-friendliness, and Green activities, among other terms, are given weight in many quarters of the marketplace. Businesses are now tapping into society’s concern over global climate change by trying to mitigate


their purported role in straining the ecosystem through their production of GHG (primarily carbon dioxide), acid rain (primarily sulfur dioxide) and other forms of pollution (chemical, material or otherwise). These are byproducts of manufacturing, mechanization, and vehicle combustion. Can logistics and supply chain management assist in their attempt to reign in pollution? The answer is yes; in fact, it is hard to imagine how businesses could successfully become Green without leveraging the art and science of logistics and supply chain management.1 Human-generated GHGs are a byproduct of immensely complex supply chains starting from primary production (e.g., farming, mining and forestry), to manufacturing of finished goods, and ending with retail distribution. Furthermore, GHGs also result from reverse logistics: the handling of product refunds and returns; disposal of packaging; and the effort to recycle material. Since producers and consumers rarely reside close to one another, fleets of trucks, trains, ocean vessels, airplanes and pipelines are necessary to move commodities from market to market. As any point in the supply chain runs up against a bottleneck, not only do costs rise but so do the environmental impact from queuing; that is, vehicle engine idling, air cargo planes flying in a holding pattern, etc. Also, the liberalization of international trade flows since 1945 has meant that commodities are sourced and sold over multiple countries, thereby increasing transport distances (and their concomitant pollution) along with the “sovereignty bottlenecks” created by the customs clearance process. For decades logisticians and supply chain managers have earned their reputations on their ability to identify inefficiencies in the flow of inputs, goods, services, information, money and workers. By the clever use of transportation, inventory control, production, distribution, marketing and customer service, they strove to reduce monetary costs, time costs and material waste in order to achieve a competitive advantage. Of course, all of this depended upon the strategic vision of all of

the organizations linked together along the supply chain–from the vendors of primary inputs through to the retailers of the finished goods. Competitive advantage could be measured in terms of market share, profits earned, return on invested capital, or share price. But beyond these financial measures businesses are now considering another measure– reduction of the carbon footprint. So, in addition to wringing money and time out of the process, today’s logisticians and supply chain managers look to wring out carbon emissions, too. Businesses are under pressure to meet these dual goals; that is, shareholders apply pressure on the financial goals while governments apply pressure on the environmental ones. It is not, therefore, an easy trade-off for a business to manage when it says that Green initiatives cost money and take time to deploy–all to the detriment of earning profits and/or keeping share prices up. Once government regulation enters the picture it becomes a state of nature that the business cannot avoid. Consider the case of an ocean carrier, a harbor craft, and a drayage trucker or a railway which all make use of a busy port. If there is a government requirement for clean air and pollution abatement in place, one can expect that no port expansion would be allowed without some effort to deploy Green technology in tandem. Without it, the port expansion would be rejected by the government, bottlenecks would continue to grow, vehicles would generate excess pollution through engine idling and air quality would worsen. In this scenario the deployment of seemingly costly new technology would be a necessary political outcome to break the vicious circle. The process is now underway in many places with the best example being the 2008 Los Angeles and Long Beach Clean Truck Program. Given the 5,600 clean diesel and alternative fuel trucks which entered this market since then, diesel-related particulate matter has been reduced by 80%. Currently, about 90% of the trucks calling on the ports of Los Angeles and Long Beach are Green (The Journal of Commerce. p. 8). In 2010, all trucks built before

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1994 were banned and all 1994-2003 trucks were also banned unless retrofitted. The goal is to have 100% Green compliance by 2012. Apart from investing in vehicles with new technology, cost reduction and eliminating waste are proxies for Green initiatives. This is especially important given the current economic slowdown; where firms are focused on surviving let alone focusing on the environment. Such methods involve route optimizing to minimize idling and avoiding congestion; minimizing empty backhauls; moving from less-than-truckload (LTL) to truckload (TL) operations in order to minimize delivery layovers; and switching transportation modes.2 Still, post-WWII globalization has seen accelerated growth in international ocean vessel and air cargo operations. This has made national regulation more difficult since these respective carriers, unlike trucks and rail, traverse international waters and multiple airspaces. As such, the transportation sector occupies a unique position in the United Nations Framework Convention on Climate Change (UNFCCC). When the nations of the world met in Copenhagen in December 2009 to reach a consensus to reduce GHG emissions, the U.N. International Maritime Organization (IMO) and the International Civil Aviation Organization (ICAO) were at the table as well and given administrative authority over their modes of transport. But there is no agreed-to method as yet. Options include a carbon tax, cap-and-trade, mandates for Green technology, or combinations of the three. Still, nations or trade blocs could opt for their own regulations covering domestic harbors and airports thereby creating a confusing patchwork. Of course, there has never been a level-playing field. Since the 1997 Kyoto Protocols, developed countries were required to make binding commitments to reduce GHGs while developing countries were not. Then, as now, China and India are labeled as developing; so if the United States or the European Union is to lead, China and India need not follow. The transportation process benefits from economies of scale; that is, the lowering of long

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run average costs as the scale of the operation increases. Scale is achieved in a variety of ways. For example, as a fleet increases in size the number of routes increases at a faster pace due to the opportunity to interline vehicles at terminals or hubs. Since operations increase as more route options become available, total costs are not rising as fast as are operations; and this is a source of economies of scale. This is the raison d’etre for the less-than-truckload (LTL) trucking industry. Of course, if a firm can manage to fill an entire truck it may receive a bulk discount and enjoy faster service. While that may reduce an individual firm’s carbon footprint, it may not have much of an effect on that for the carrier’s transportation network.3 Lean manufacturing and just-in-time purchasing rely on small but frequent shipments; therefore, a carrier would need to operate in a LTL fashion in order to fill vehicles. With minimal storage and production only as needed, a producer’s carbon footprint is reduced but the carrier’s is increased. This is a perennial problem in logistics and supply chain management: managing trade-offs. Another important source of scale is vehicle size. As vehicles increase in size the costs to operate them do not rise as quickly. Think of how a crew size would not have to double if the capacity of an airplane, or number of boxcars attached to a locomotive, were to double. Over all modes of transport, size economies have been exploited to the greatest degree in ocean vessel shipping. Since fuel burn would not double if the number of containers the vessel could carry were to double, the ratio of pollutants per ton or per container drops. Some large container vessels today employ sails, burn liquefied natural gas, and some use a waste heat recovery system which takes exhaust gases from the engine and turn them into onboard electric power instead of letting the exhaust escape into the atmosphere. A problem facing transportation planners is how to arrange for backhauls. A consequence of every front haul is a backhaul, whether loaded or not. These are jointly supplied as a result of a


roundtrip back to the carrier’s domicile. When a load is not available at the front haul’s destination, a carrier may resort to repositioning the vehicle, trailer, boxcar or container to a point to allow for a backhaul move. Eliminating empty backhaul miles gains efficiency in equipment usage, moves more freight per unit of fuel burned, and lowers freight rates for both the front haul and backhaul shippers--- since they, effectively, share the overall cost of the roundtrip.4 Still, the merchandise trade deficit which the U.S. and EU have with China means that containers will arrive full from the Far East, only to be stored, repositioned or hauled back to China empty. Some EU ports noted concern about congestion caused by handling empty containers. In early 2007, for example, the port of Rotterdam refused to accept empty containers when a combination of bad weather and holidays in China and Europe lead to a backlog (Wright. p. 4). “With the global container population exceeding 25 million TEU (Twenty-foot Equivalent Unit) and the annual production of new boxes exceeding 3 million TEU it is estimated that around 1.5 million TEU of empty containers are sitting in yards and depots around the world waiting for use. Although utilization rates have improved since 2004, container utilization depends on the very dynamic nature of container transportation, and the container building and leasing industries. [C]ontainership fleet capacity is 13,335,155 TEU, while… the total container fleet is 25,365,000 TEU. Projections indicate that the container fleet size as well as the vessel size will continue to increase as newbuilds [sic] are being added to the current fleets to accommodate the increase in trade demand. This is an indication that the volume of empty containers that will need to be handled in the future will continue to increase.” (Theofanis and Boile. p. 52). To make matters worse, ocean carriers infrequently share containers among themselves, and they charge fees to consignees who keep containers longer than necessary to unload their contents. The result is that the empty container

heads back to a possibly already congested port. Drewry Shipping Consultants have estimated that 19-22% of container movements are by empty ones. The reason behind these activities is that ocean vessel carriers prefer to have tight control over their infrastructure. Retail giant, Wal-Mart announced a plan in 2009 to develop a Green Label. Basically, WalMart would use its supply chain dominance and, at first, survey its more than 100,000 suppliers regarding its Green practices. Over the next five years the company will use the data to develop a “sustainability index” and, from there, assign labels to its products. The label will cover carbon dioxide, solid waste and water pollution. The intent is to manage reductions in pollution by first measuring just how much there is in the company’s supply chain. Only time will tell if Wal-Mart is willing to make tough decisions based on the data it collects. For example, a vendor in China may have a larger footprint than one in the United States yet, accounting for potential labor cost savings, may have a lower total cost of ownership. Wal-Mart’s “Everyday Low Prices” motto could be challenged. On the other hand, near-sourcing would make sense if the carbon footprint in transportation is determined to, socially speaking, outweigh the labor cost savings. Apart from labeling it is not clear if the sustainability index would be used as a vendor screening tool. Indeed, life-cycle accounting would measure sustainability from raw material extraction all the way to the sale and disposal in any reverse logistics processes. Of course, there are production, packaging, transportation and storage processes at many points along the supply chain. And Wal-Mart, at the retail end, contributes its fair share of responsibility for various points along the chain. So, Wal-Mart needs to collaborate with its vendors as opposed to simply “labeling” them. The essence of supply chain management is the art of collaboration.

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FUTURE RESEARCH Managing logistics and supply chains is, as noted above, an exercise in trade-offs. Also, transportation is currently the sector responsible for the largest share of carbon emissions. Bringing down GHG emissions in transportation, through larger loads with less frequent hauls, may serve to increase emissions in the production sector. Whether this ends up as a net increase or loss in GHG emissions is a matter of further research. Still, inventory sitting in a warehouse contributes less of a carbon footprint than having the items in transit (especially in a just-in-time format). Also, companies deploying higher-cost Green technologies are at a first-mover disadvantage but are, at least, embarking on a learning curve which might serve to improve the design and use of the technology over time. Further research involves estimating the cost of deployment, and its effect on the bottom line of key companies. Of course, with such information the government may be in a better position to regulate their use and/or subsidize companies which choose to use Green technologies.

CONCLUSION Green logistics and supply chain management must be primarily concerned with the environmental impact of transportation. As the logistical activity responsible for the largest share of GHGs, and its role in facilitating the extension of supply chains across the world, the key to controlling GHG emissions comes from leveraging new technology applied to transportation. Yet there are trade-offs which occur as one logistical activity is managed and another is adversely affected as a result. Such technology has a first-mover disadvantage unless subsidized by the government. Larger, less frequent loads may reduce GHG emissions from transportation but the larger productions runs and increased inventory and storage costs

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will increase GHG emissions on the production side. The overall effect on the total logistical costs along the supply chain would be hard to determine. The nature of the trade-off is very complex. Green logistics and supply chain management adds yet another layer of complexity to an already complex system of business relations with significant environmental implications.

REFERENCES Cooke, J. (2009). On the road to a smaller carbon footprint. CSCMP’s Supply Chain Quarterly, 40-3. The Economist. (2010, January 2-8). (p. 43). The Journal of Commerce, 10(48), 8. (2009). Theofanis, S., & Boile, M. (2009). Empty marine container logistics: Facts, issues and management strategies. GeoJournal, 74(1), 51–65. doi:10.1007/ s10708-008-9214-0 U.S. Bureau of Transportation. (2008). Transportation statistics annual report. Wright, R. (2007, February 23). Acute congestion forces Dutch terminal to ban empty containers. Financial Times (North American Edition), 4.

ENDNOTES 1

2

3

The term “Green” will be used here to encompass all the various environmental goals a business might have. Rail, for example, has an economy of scale that a truck cannot match. A freight train can move one ton of cargo about 450 miles on a single gallon of diesel fuel. Yogurt-maker, Stonyfield Farm of Londonderry, New Hampshire was able to create truckload (TL) shipments because of its ability to negotiate minimum orders with its downstream customers. As a result its carbon


4

dioxide emission per ton declined by 40% (Cooke 2009; p. 42-3). Firms without such power in their supply chains may not be so fortunate. For a similar shipment the backhaul shipper would actually be charged a lower freight rate than the front haul shipper because the former should only be charged the costs

attributable to a loaded backhaul. In other words, those costs which would have accrued to an empty backhaul would be charged to the front haul shipper since his haul would have resulted in those costs even if there were no backhaul load. This is how joint costs are properly allocated.

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Chapter 21

Greener Transportation Infrastructure:

Theoretical Concepts for the Environmental Evaluation of Airports Jean-Christophe Fann Université Libre de Bruxelles, Belgium & University of California, Berkeley, USA Jasenka Rakas University of California, Berkeley, USA

ABSTRACT The adoption of greener construction practices occurs mostly in the realm of building projects. Existing environmental evaluations are often generic, and hence, unable to manage the complexity of larger infrastructure systems such as airports. To respond to this need, the authors of this chapter developed the theoretical grounds for the evaluation of greener airport systems. The proposed concepts demonstrate how to implement greener practices from the early stages of a transportation infrastructure project in an economically rational and stakeholder-focused manner. The presented methodology has two fundamental goals: first, to foster greener design practices among airport managers, planners, and designers, and second, to establish a dynamic dialogue between all airport stakeholders, while overcoming the shortcomings of traditional environmental impact assessments and thus ensuring capacity enhancement. The innovative aspects of the methodology are the combination of a flexible implementation strategy, the use of Multi-Criteria Decision Making (MCDM) with cost and utility functions, and a structured definition of environmental sustainability with customized evaluation parameters. DOI: 10.4018/978-1-60960-531-5.ch021


Greener Transportation Infrastructure

INTRODUCTION Transportation infrastructure is a key strategic asset for economic development but it also has a major impact on the environment. In recent years, the adoption of green practices has been mostly occurring in the case of individual building projects and there is a lack of environmental assessment tools capable of handling complex infrastructure systems such as airports. To address these needs, this chapter introduces theoretical concepts for an environmental evaluation of airport systems. The development of a new methodology demonstrates how to implement greener practices from the early stages of a transportation infrastructure project in an economically rational and stakeholder-focused manner. The concepts presented here also remain valid and applicable to other types of infrastructure systems. Airport development is facing growing concerns from direct stakeholders and the general public as a result of its significant adverse impacts on local communities and the environment. There is widespread recognition of the environmental repercussions of airport construction and operation at both the local and global levels (Janic, 1999). Such concerns consistently constrain airport development, despite its crucial role in the economic growth of a region. Although many airports implement programs that address a variety of daily operational issues such as the use of alternative fuels and improved air traffic management procedures (ACI, 2009b; GRI, 2009), there is currently no uniform or structured approach in place to improve the planning and design of airport development. This study seeks to specifically address the environmental aspect under consideration at these life-cycle stages since decisions made at the beginning of a project have considerable long-term environmental impact. The development of an evaluation methodology has two fundamental objectives: first, to foster greener design practices among airport

managers, planners, and designers, and second, to establish a dynamic dialogue between all airport stakeholders, while overcoming the shortcomings of traditional environmental impact assessments and thus ensuring capacity enhancement. This chapter contributes to the state of the knowledge in airport environmental management by proposing the combination of five distinct considerations: (1) the evaluation of environmental sustainability with a focus on the planning and design stages of airport facilities, (2) a procedure for screening and ranking alternatives, (3) examples of applicable performance criteria, objectives and indicators with sample scoring procedures, (4) a MultiCriteria Decision Making (MCDM) approach combined with cost and utility functions, and (5) a flexible implementation strategy to enable endusers to adjust the complexity of the evaluation. This study is intended to open a discussion for the development of a methodological tool that fulfills aims of promoting greener airport design, while at the same time satisfactorily addressing stakeholder concerns. In this chapter, we start by reviewing existing practices and argue the need for an evaluation methodology specifically tailored for airport systems. From there, we identify the main challenges for an effective and transparent evaluation process in line with our two fundamental objectives. We analyze the respective pros and cons of features from existing methods to determine the most relevant concepts and techniques. We subsequently present our step-by-step methodology for evaluating the environmental sustainability of airport systems and demonstrate how it addresses the shortcomings of existing methods. A numerical example and a selection of performance criteria illustrate real-world applicability. Finally, arguments on the inclusion of a life-cycle perspective and discussion on the development of a dynamic stakeholder platform call for further research on the topic.

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BACKGROUND A review of industry practice and scholarly literature shows that there is currently no generic assessment procedure designed to accommodate the complexity and specificity of airport systems, nor to provide a platform for discussion among interested parties. Effective consideration of stakeholder concerns is central to the progress of the project and to avoiding possible litigation costs. An effective methodology should also be applicable to a broad range of project scales, from the minor remodeling of existing facilities to the complete development of new systems, covering most airport functional categories including but not limited to airside infrastructure, terminal buildings, cargo facilities, ground transportation and airport support equipment. Common practices to demonstrate the environmental sustainability of master plan proposals typically include the preparation of intensely comprehensive regulatory environmental impact assessments (FAA, 2006), the certification of new buildings using generic green building standards (USGBC, 2008), and qualitative evaluations on a case-by-case basis. In rare instances, local airport authorities have developed their own sustainability design and construction guidelines to offset the absence of a more adequate method (City of Chicago OMP, 2003; LAWA, 2009). Doubts as to the actual effectiveness of traditional measures, which are meant to demonstrate the adequacy of development proposals, often arise among the relevant stakeholders—primarily members of nearby communities. The complexity and breadth of Environmental Impact Assessments (EIA) and Statements (EIS), defined in the ISO 14011 standard (ISO, 1996), make them difficult for the general public to access. Green building certifications are popular but they are unable to address the characteristic challenges of airport facilities. Finally, the qualitative assessment of such impacts is inherently subjective and subject

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to ardent debate among decision makers and influence groups, both over style and substance. The theory put forth here differs from impact assessments and inventory analyses in that the aim is not to compute the absolute intensity of environmental impacts caused by an airport project but rather to develop procedures for the relative comparison of different airport plans and designs. The wording ‘alternatives’ will henceforth refer to planning and design variations of an airport development project and not alternatives to the expansion or creation of an airport, for instance by using other modes of transportation. The development of the present evaluation concept drew upon detailed reviews of established practices in the fields of green construction and airport sustainability practices, in addition to evaluation methods from adjacent engineering fields such as transportation and building materials (Table 1). We also consulted scholarly works on such topics as Multi-Criteria Analysis (MCA) in transportation and environmental planning (Lahdelma, Salminen, & Hokkanen, 2000; Rakas, Teodorović, & Kim, 2004; Tsamboulas & Kopsacheili, 2003; Vreeker, Nijkamp, & Ter Welle, 2002), environmental impact assessment procedures (Franssen, Staatsen, & Lebret, 2002), design of environmental indicators (Lammers & Gilbert, 1999), life-cycle analysis (Chester, 2008; Junnila, 2003) (Lenzen, Murray, Korte, & Dey, 2003), and airport sustainability theory (Upham, Thomas, Gillingwater, & Raper, 2003; Upham et al., 2004; Upham & Mills, 2005).

CHALLENGES OF AN EFFECTIVE EVALUATION PROCESS An effective environmental evaluation process combines scientific accuracy and utmost reliability while being practical and easy to understand for the general public. The key challenges are therefore to tailor a methodology specific for infrastructure


Table 1. Review of selected evaluations methods and airport environmental practices Sector / Item

Description

Reference

• Industry-wide data

− Airports Council International (ACI) EONS − Global Reporting Initiative (GRI), Sustainability Reporting at Airports − Transportation Research Board, Airport Sustainability Practices

(ACI, 2009b) (GRI, 2009) (Airport Futures PAG, 2009)

• Case studies

− Port of Seattle, Managing a Green Airport − British Airport Authority, Heathrow − San Diego, Destination Lindbergh − Port of Portland, Airport Futures

(Port of Seattle, 2007) (BAA Heathrow, 2007) (Jacobs Consultancy, 2009) (Airport Futures PAG, 2009)

• Individual sustainability guides

− Chicago O’Hare Modernization Program − Los Angeles World Airports

(City of Chicago OMP, 2003) (LAWA, 2009)

• Green building certification frameworks

− United States Green Building Council Leadership in Energy and Environmental Design (LEED) − Haute Qualité Environnementale (HQE) − BRE Environmental Assessment Method (BREEAM)

(USGBC, 2008) (Association HQE, 2006) (BREEAM, 2009)

• Environmental evaluation frameworks

− Evaluation Framework of Environmental Impacts and Costs of Transport Initiatives (EFECT) − U.S. NIST Building for Environmental and Economic Sustainability (BEES) − U.S. EPA Tool for the Reduction and Assessment of Chemical and Other Environmental Impacts (TRACI)

(Tsamboulas & Mikroudis, 2000) (Lippiatt & Boyles, 2001) (Bare, Norris, Pennington, & McKone, 2002)

Airports

Other sectors

projects and to handle the evaluation criteria in the most transparent manner.

Definition of Environmental Sustainability The primary challenge of this evaluation is its need to use the fewest and most readily available performance data to build an adequate understanding of the sustainability of the system. To achieve this, we suggest defining the environmental sustainability of an alternative with recourse to a hierarchical structure that organizes a selection of impact categories with functional areas and relates these parameters to specific criteria (the elements forming the decision), objectives (the intent toward a specific criteria), and indicators (metrics used for assessing a particular criteria). Performance indicators serve as proxies for measuring the overall performance of the system and limit the need for gathering data. Carefully chosen,

they have the potential to provide decision makers with a measure of relevant performance, but also to flag problem areas (Jasch, 2000). While several frameworks exist for indicating the sustainability of a system, we have selected an impact-based approach that focuses on the nature and extent of various kinds of impacts on the airport system, without necessarily capturing causal factors and corrective actions (Jeon & Amekudzi, 2005). We begin with a definition of sustainability goals. The basic research question is “Which alternative is the most environmentally sustainable?” Opinions from industry and academia help define the concept of environmental sustainability at the planning and design stages of an airport’s life-cycle. In this chapter, we provide a paradigm inspired by the procedure for life-cycle assessment (LCA) outlined in the international standard ISO 14040 (ISO, 2006). The definition of the environmental sustainability of each evaluated alternative is established along three guidelines.

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First, end-users select the most applicable impact categories and functional areas. Second, they agree upon specific criteria and objectives for each category. Third, they analyze each alternative’s performance toward each criterion. The proposed answer to the basic research question is that the best performing alternative is one that fulfills best the criteria and objectives specified for each impact category and functional area. The inclusion of LCA concepts in the evaluation process is explored later in this chapter. In the development of the U.S. Environmental Protection Agency (EPA) Tool for the Reduction and Assessment of Chemical and Other Environmental Impacts (TRACI), Bare et al. (2002) observed that impact categories are generally of two types: (1) depletion categories, which include abiotic and biotic resource depletion, land use, and water use, and (2) pollution categories, which include ozone depletion, global warming, human toxicology, eco-toxicology, smog formation, acidification, eutrophication, odor, noise, radiation, and waste heat. In this paper, we present a set of global impact categories that have consequences at global level as well as a set of local impact categories, where the consequences are limited to the immediate vicinity of an airport project. These categories are considered to be minimal and to reflect the most significant and commonly reported impacts caused by airport development. Future development should aim toward considering, at the very least, all impact categories defined in the TRACI framework. End-users are invited to adopt an “avoid-minimize-mitigate” strategy: decision-makers should consequently strive to avoid negative impacts, and if not, to minimize and mitigate their effects (Airport Futures PAG, 2009). The definition of sustainability objectives for each impact category follows this strategy. The impact categories are outlined below, based on and adapted from Bare et al. (2002) and Janic (1999):

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Global Impacts (At World Level) •

•

Global Warming: The contribution of Greenhouse gases (GHGs) emissions and their build-up in the earth’s atmosphere to anthropogenic climate change (IPCC, 2007). The objective is to avoid-minimizemitigate GHGs emissions. Resource Depletion: Consumption of biotic and abiotic resources and production of waste in addition to the impacts of mining and quarrying (Douglas & Lawson, 2003). The objective is to avoid-minimizemitigate natural resources consumption and waste as well as to maximize the use of existing facilities and materials, such as recycled or renewable resources.

Local Impacts (At the Airport System and Local Community Level) •

•

•

•

Noise: Noise in the vicinity of airports caused by aircraft movements at the airport. The objective is to avoid-minimizemitigate elevated noise levels in the surrounding areas. Air Quality: Air pollution caused by aircraft engine emissions, airport motor vehicles, access traffic and other sources. The objective is to avoid-minimize-mitigate impacts on local, regional but also indoor air quality. Water Quality: Water pollution caused by inadequate treatment of waste, deicing fluid runoff, surface fuel spills, and groundwater contamination. The objective is to avoid-minimize-mitigate pollution to adjacent water bodies and wetlands as well as to limit stormwater runoffs to prevent downstream erosion and groundwater depletion. Land Disturbance: Loss of land and land use restrictions. The objective is to avoidminimize-mitigate pressure on greenfield


•

•

and undeveloped land as well as to remediate damaged sites and ensure land use compatibility with airport activity. Wildlife: Adverse impacts on wildlife habitat and populations. The objective is to avoid-minimize-mitigate such impacts, to prevent the attraction of wildlife on aircraft operation areas and create or promote wildlife habitats where there is no risk of aircraft hazards. Local Climate: Heat islands due to the artificial thermal loading of surfaces. The objective is to avoid-minimize-mitigate the impacts of heat islands effects on the health and welfare of neighboring communities.

Our analysis addresses environmental impacts caused by activity in five functional areas: •

•

•

•

•

Airfield includes areas of aircraft operation: runways, taxiways, ramps, and remote parking. Ground Support Equipment (GSE) includes airport and aircraft support services. Typical GSEs are: aircraft pushback tractor, conditioned air unit, air start unit, baggage tug, belt loader, bobtail, cargo loader, cart, deicer, forklift, fuel truck, ground power units (GPU), lavatory cart, lavatory truck, lift, maintenance truck, service truck, bus, car, pickup truck, van, and water truck (U.S. EPA, 1999). Terminal Facilities includes concourses, gates, check-in and baggage claim areas, cargo terminals, and ancillary offices. Ground Transportation includes parking garages, public transit stations and access roads. General Planning refers to all general aspects of infrastructure design and development that typically involve more than one of the other distinct categories. It may also

include functions not covered by other categories.

Implementation Strategy Airports are by nature significantly different from one another. All commercial airports however consist of similar components, which make the development of a generic method appropriate. A modular structure addresses the singularity of each particular project. It allows decision-makers to combine their own set of modules, i.e. their own combination of criteria clusters, to address the specific scale of any individual project and the airport functional categories that are involved. For example, airports that do not use de-icing equipment may simply omit the inclusion of the de-icing criteria cluster. The concept is applicable when several planning and design options are under consideration and expected to leave different environmental footprints. In any case, decision-makers should be in agreement regarding the goal and scope of the development project as well as its requirements on other grounds such as economic viability, social responsibility, and operational efficiency (including safety and capacity). End-users may include individuals such as airport managers, planners, designers, and public figures (local, regional or national). In a typical planning process for preparing an airport master plan, the application of these concepts would follow preliminary impact studies that consider a number of alternatives and precede detailed regulatory reviews of the selected master plan’s environmental consequences (Figure 1). The preparation of preliminary impact studies benefits this evaluation process as it provides data for the performance indicators used in the evaluation process. From a stakeholder perspective, using environmental indicators is less data-intensive and hence, enables an active involvement by all interested parties. For instance, representatives from all parties would be able to collaborate with

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Figure 1. Role of the evaluation in a generic project development process

the decision-makers on a sustainability committee in charge of managing the screening process. The committee would benefit from the modular structure of the evaluation methodology by selecting only evaluation parameters that are most pertinent to their particular project. The committee may also propose specific strategies for achieving environmental goals. Airport authorities may also elect to include the method within Environmental Management Systems (EMS) as defined in the international standard ISO 14001 (2004).

Multi-Criteria Decision Making Procedure The aggregation of evaluation parameters is a key concern in any assessment process. We suggest the more objective approach of discriminating quantitative and qualitative criteria and handling them with cost and utility functions. The use of MultiCriteria Analysis (MCA) brings a structured and analytic evaluation of each proposal’s advantages and disadvantages and gives consistency to the decision-making process (Triantaphyllou, 2000). MCA methods take into account both qualitative and quantitative measures, which has proven useful in EIAs for project evaluation, mitigation evaluation, and the design of environmental

400

indices (Balasubramaniam & Voulvoulis, 2005). Strategies differ as to the scoring of criteria and the aggregation of individual scores into an overall ranking of development options. As part of the present study, we assessed the capability of several MCA procedures to fulfill our evaluation needs. Five common MCA procedures, listed in ascending complexity, contributed to the rationale of the procedures suggested in the present evaluation methodology. For more information on MCA procedures, see Tsamboulas (1999), Triantaphyllou (2000), and Tsamboulas & Kopsacheili (2003). 1. Performance matrix: The relative qualities of each option are assessed by direct performance inspection without scoring and weighting. The dominant option should perform strictly better than other ones on at least one criterion and at least equal in their performance on all other criteria. 2. Outranking process: The concept of outranking eliminates all alternatives that are considered dominated. Weights give more influence to some criteria and define dominance. Critical threshold values may be introduced to outrank options that exceed environmental or regulatory limits.


3. Linear additive models: An additive function combines individual values of an option into one overall value. It multiplies the value score on each criterion by the weight before adding all those weighted scores together. The weighted sum model (WSM) is a commonly used approach. 4. Pairwise comparisons: This process consists of developing a linear additive model and deriving weights and scores based on pairwise comparisons between criteria and alternatives (Saaty, 2008). Procedures using pairwise comparisons include the Eigen value method, the Anayltic Hierarchy Process (AHP) and the Delphi method. 5. Multi-Attribute Utility Theory (MAUT): Utility theory gives decision-makers the ability to quantify the desirability of certain alternatives. It uses mathematical functions—utility functions—to represent the decision-makers’ preferences given the relative performance of each option toward specific criteria. It does allow the calculation of a single number index, U, which represents the overall valuation of decision-makers for

a particular option. The most commonly used functions are linear, crooked linear or multiplicative (Winston, 1994). Users should note that the most complex methods are not necessarily the most appropriate in all cases. Although pairwise comparisons are commonly used in environmental evaluations for the purpose of computing weights, industry professionals—notably consultants from Jacobs Consultancy—and professors at the University of California, Berkeley express their concerns about using the AHP with pairwise comparisons on an airport master plan project. In their experience, stakeholders fail to recognize the legitimacy of such a method when its outcome differs from their initial opinion. Two frequent issues arise: first, participants often do not have an analytical background and therefore see the tool as a ‘black box’; second, many voters fail to meet consistency requirements when inputting comparisons and weights, making the process inaccurate. While pairwise comparisons derive weights in a quasiindependent manner, the process is not practical when considering more than a few criteria; using 20

Table 2. Strengths and shortcomings of commonly applied MCA procedures Strengths

Shortcomings

Features of the proposed methodology inspired from each MCA procedure

Â€Â€Â€Â€• Performance matrix

Straightforward and direct inspection

Mostly qualitative

Inclusion of a performance matrix acceptable for projects with a low level of complexity

Â€Â€Â€Â€• Outranking process

Direct elimination of alternatives that do not match specific criteria

Approach focuses on thresholds and does not consider overall picture

Inclusion of critical threshold values to ensure that maximal impact values are not exceeded

Â€Â€Â€Â€• Linear additive model

Simple and easy to implement

Unable to handle qualitative criteria

Inclusion of a weighted sum model to determine separately a cost performance for quantitative scores and a utility performance for qualitative scores

Â€Â€Â€Â€• Pairwise comparison

Simple and easy to implement

Unreliable with larger numbers of criteria

Inclusion of a weighting process with different weight determination procedures

Â€Â€Â€Â€• MAUT

Appropriate for qualitative criteria

Utility is not an optimal description of quantitative criteria

Inclusion of utility functions for qualitative criteria

MCA Procedures

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criteria, for example, would make experts conduct 190 independent pairwise comparisons, whereas considering clusters of 5 criteria would still involve 10 comparisons at the cluster level in addition to 6 comparisons in each cluster, leading to a total of 40 comparisons. Consequently, we decided not to apply the whole procedure of the AHP but rather, to suggest using pairwise comparisons only on small amounts of qualitative criteria. The proposed methodology involves a set of various procedures that end-users may choose between, based on their individual priorities and their project’s scope. These range from using a performance matrix, arbitrary weights and pairwise comparisons to applying more sophisticated procedures using utility and cost functions, inspired by MAUT. See the aforementioned sources for more on the application of these procedures.

Life-Cycle Analysis Life-cycle analysis is a fundamental theory in environmental evaluations. This paradigm recognizes that a product has environmental impacts throughout its entire life-cycle. Within the construction industry, LCA is a method for the systematic environmental assessment of a project from raw material extraction through construction and use to end-of-life management. This method has gained prominence over the last decade, notably in its application to commercial buildings (Guggemos, 2004; Junnila, 2003) as well as its inclusion in the U.S. EPA TRACI framework (Bare et al., 2002). The LEED green building rating system has faced criticism over its emphasis on apparent environmental benefit without an equal concern for the durability of the products employed to achieve this benefit. Humbert et al. (Humbert, Abeck, Bali, & Horvath, 2007) performed a critical evaluation of the LEED system using LCA and the U.S. Green Building Council (USBGC) recently announced the inclusion of LCA in future versions of LEED (USGBC, 2007).

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At the airport system level, we define the following life-cycle stages: planning, design, material sourcing, construction, operation, maintenance, demolition and recycling. While significant efforts are made in the aviation industry to minimize the environmental impacts of airport operations—for example, current efforts to use biofuels and renewable sources of energy—the method proposed here specifically addresses decisions made during the planning and design phases of system development. These are indeed likely to have the most significant impacts in the long term. A true assessment of an airport master plan’s sustainability should rely on a “cradle-to-grave” approach and here we provide perspectives on the applicability of LCA to airports and more specifically its inclusion in this method. This evaluation method accounts for the impact of products throughout their life-cycle by including material durability as a parameter for sustainability evaluation. While this addition is relatively straightforward, the authors’ philosophy is to develop an awareness of the LCA theory in environmental evaluation endeavors. As procedures evolve and more data on materials and products become available, comprehensive LCA studies on specific components of an airport master plan will become possible. At this stage, there is no real value in conducting a full LCA of an airport project. Indeed, the advantage of understanding the environmental impact of the development is clearly outweighed by the cost of gathering impact data for all the components, down to the finishes and fitting out of each building. When such data becomes more widely available, holistic LCAs would increase the reliability of the evaluation and ranking in general as well as the adequacy of selected indicators. Further studies should always, however, endeavor to keep the evaluation process as simple as possible to ensure transparency and understanding by all stakeholders.


PROPOSED METHODOLOGY Having developed the theoretical requirements of the methodology, we can now describe the actual structure of the evaluation process. Step-by-step procedures are presented to help end-users evaluate master plan proposals for a generic airport. This hypothetical example is designed to encompass most major environmental issues that large airports frequently face. For practical reasons, a core method is presented using the highest level of complexity and reliability among those presented above. For a less detailed evaluation, end-users should use less sophisticated features such as a performance matrix, or simply reduce the amount of quantitative measures. For a more detailed evaluation, the treatment of uncertainty

can also be added to the modular structure. It is important to note that implementing this method at such a level of complexity would by no means be immediate. At the very least, it would require further investigation into the accuracy of selected objectives and indicators. The method as presented here should be readily applicable to a real-world scenario of limited scope, with end-users applying the framework in a primarily qualitative manner. Specific research conducted on the relevance of each quantitative measurement will enable more sophisticated implementation in the future. Focusing on a specific airport development project for which several planning and design alternatives are proposed, let A = {Ai, for i = 1, 2,…,n} be this finite set of decision alternatives. The method comprises six key steps (Figure 2): (1)

Figure 2. Structure of the evaluation method

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The result is an influence matrix relating impact categories to functional areas (Table 3). For a simpler evaluation, end-users may elect only to retain categories and areas that show a high degree of correlation. This first step gives endusers a better understanding of the parameters which influence the environmental sustainability of each alternative. At this point, end-users should also propose sustainability goals and strategies for avoiding, minimizing, and mitigating impacts in each category. The effective performance of these strategies will be evaluated in the next steps of the process. Users may build their own influence matrix by combining the impact categories that matter most to their project stakeholders with the functional areas that pertain to the development project. This information is typically available in planning and impact assessment documents.

selecting impact categories, sustainability goals, and functional areas that correspond to the project’s scope, (2), structuring the problem using criteria clusters and objectives, (3) defining performance indicators that provide data for decision criteria used to evaluate each alternative’s performance, (4) calculating a score for each criteria, (5) estimating criteria weights and aggregating individual scores, and finally (6) ranking alternatives. The final result and its details provide a basis for resolving conflicts and making a decision.

Selection of Impact Categories, Sustainability Goals and Functional Areas The first step of the process is to define the field of analysis. This generic example considers master plan components that cause most issues at airports throughout the world as reported by ACI and the Global Reporting Initiative. Assuming the role of a master plan sustainability committee, we have selected impact categories to be studied. It should be noted that some airport functions will cause impacts in more than one category. In this case, supplementary categories are defined to combine individual categories. Next, functional areas that pertain to the scope of our master plan are defined and related to each impact category.

Definition of Criteria Clusters and Objectives Assessment of the impacts caused by selected functional areas can be made by appropriately defining criteria clusters and objectives. Criteria clusters relate to specific objectives and use indicators to report on the fulfillment of these objectives. The first step is to define a group for

Table 3. Example of influence matrix with impact categories and functional areas General Planning Global Warming

Airfield

●

Global Warming and Air Quality

● ●

●

●

● ●

Local Climate and Wildlife

● ●

Wildlife

●

Land Disturbance

●

404

Ground Transportation

●

Noise Water Quality

Terminal Facilities ●

Air Quality Resource Depletion

GSE

●

●


each specific functional area of interest. Step two is to propose criteria clusters. The last step is to define specific objectives and assign them to one or more impact category. This structure allows end-users to select modules that best match the specific components of their master plan project. An example table of criteria clusters and objectives is shown in Table 4. Users may develop their own table by defining a group for each key functional area and developing criteria clusters within them. Criteria clusters that matter most will likely be emphasized in planning documents and environmental impact assessments. Ideally, such parameters should be defined in conjunctions with project stakeholders to ensure mutual understanding from the preliminary phases of the evaluation. In this example, “Group B: Airfield” is proposed for the analysis of environmental impacts specific to the airfield functional area of the project. Within this group, criteria clusters for runways and taxiways, GSE, noise and de-icing are defined. Within each cluster, individual goals are defined, such as reducing ground vehicles emissions, and attributed to the relevant impact categories; in this case, global warming and air quality. The same procedure is then applied throughout the project of interest and leads to the construction of a table of criteria clusters and objectives.

Definition of Performance Indicators and Decision Criteria The next step is to evaluate the performance of each alternative toward the selected objectives. The proposed method utilizes performance indicators as a means for collecting data. For each objective, end-users select one or more indicators to report on the performance of a proposal in a particular field. The characteristics of these indicators contribute highly to the accuracy and reliability of the evaluation process. The range of indicators must be selected so that it is useful, manageable and effective at indicating the environmental sustain-

ability of the design. End-users should ensure that important aspects of the master plan are reflected in the selection while also limiting parameters to a minimum in order to ensure simplicity (Table 5). Each indicator provides evaluation data in the form of a decision criterion. Let C = {Cj, for j = 1,2,…,m} be this finite set of criteria. We distinguish two types of values: qualitative and quantitative criteria. A criterion is considered qualitative when it describes an observation expressed on a quality scale: ranging from low to high, or bad to good, for example. A criterion is considered quantitative when it describes a quantity on a numeric scale. Qualitative criteria are inherently subjective and accurate evaluations necessarily rely on the inclusion of quantitative measures. It is important, therefore, to use quantitative criteria wherever possible. These have the advantage of being expressed in a particular unit that can then be converted into an absolute or relative value. Two types of scoring apply to these indicators: for a quality index, a higher score indicates better quality for the environment, whereas for a pollution index, a lower score is the better. Wherever possible, several levels of indicators with varying levels of data requirements should be used. In our example, level 1 indicators are generally qualitative and intended to depict rank potential for quality improvement or pollution reduction between alternatives—these are particularly relevant when a low level of complexity is required—whereas level 2 and 3 indicators tend toward quantitative performance-based measures. Quantitative measures help differentiate alternatives with similar opportunities for a specific objective as they provide additional scoring information. To illustrate the nature of performance indicators utilized by our method, we present a set of tentative performance indicators addressing the “Airfield” functional area and its clusters of criteria. The role of indicators is to report on a specific issue while the decision criterion uses this same information for decision making purposes. A sample scoring

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406 Noise

●

Water Quality

●

●

Ensure land use compatibility with airport development


●

Preserve greenfields and undeveloped land

Group B: Airfield

●

Land Disturbance

Increase redevelopment of contaminated sites

8) Land Disturbances

●

Wildlife

Limit adverse impacts on neighboring wildlife

Local Climate

Increase distance between development and endangered species habitat

7) Wildlife

●

●

●

●

Resource Depletion

●

Air Quality

Limit adverse impacts on wetlands and waterways

●

●

Global Warming

Impact categories

Increase distance between development, wetlands and waterways

6) Wetlands

Limit stormwater flows by minimizing impervious areas

5) Stormwater

Increase rainwater collection

4) Water use

Increase existing facility reuse

3) Planning

Increase use of recycled material

Limit transportation of materials, increase use of regional materials and increase material reuse

2) Material sourcing

Develop on-site renewable and alternative energy supply

1) Energy supply

Group A: General planning

Table 4. Example of criteria clusters and objectives table


●

Reduce use of APUs and GPUs

●

●

●

●

●

●

Reduce heat islands to minimize impact on microclimate (non-roof)

●

●

●

●

●

●

Reduce heat islands to minimize impact on microclimate (roof)

Maximize natural ventilation

Maximize natural daylight

13) Architecture

Group C: Terminal and ground transportation

Limit pollution caused by aircraft de-icing fluids

12) De-icing

Limit aircraft noise exposure

●

●

11) Noise

●

Reduce fuel truck operations and risk of surface fuel spill

●

Reduce GSE emissions

10) GSE

Reduce heat islands to minimize impact on microclimate

Distance emissions from residential areas

Reduce taxiing distances and times

9) Runways & taxiways

Table 4. Continued

●

●

●

●


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procedure and a numerical example are proposed further in this chapter. This selection of indicators is intended to represent the most commonly reported environmental impacts and objectives at airports throughout the world. Users should adapt the selection of indicators to the particular needs of their project. They should also be aware that limited knowledge is currently available for the calculation of most indicators presented in this section. As a consequence, it should be expected that initial implementations will rely on primarily qualitative scoring. This tentative set should therefore be refined and adjusted by end-users depending upon the data available to them and upon the scope of their project. Further research should ensure the relevance of such indicators and establish protocols for computing relevant data. Indicators should also evolve toward being mutually preference-independent to avoid any bias in the MCA. This set of indicators is presented for illustrative purposes only and should be optimized as far as mutual independence is concerned.

Estimation of Quantitative Scores Each quantitative criterion requires a specific procedure for the computation of its score. From a governance perspective, end-users should ensure that stakeholders understand and acknowledge such procedures. The accuracy of the scoring process is again very much dependent on data availability and required sophistication. In initial implementation phases, we recommend end-users to focus on indicators that address issues already documented in preliminary impact assessments. Such studies often provide data on issues such as noise, GHGs, land use, traffic, population, air quality, water quality, historic resources, wildlife, wetlands, hazards, and human health. The nature of the method enables and encourages interaction between the evaluation process and environmental impact assessments.

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The outcome of this process is a decision matrix A containing Sij scores that represent the physical performance of alternative Ai toward the objectives assessed by criteria Cj. The final matrix includes both, utility-based and cost-based criteria (Table 6, Box 1).

Estimation of Quantitative and Qualitative Scores Using Utility Functions A utility function describing a preference score is applied at the scoring step. To handle quantitative values for which a mitigation cost may not be assessed as well as qualitative values, this procedure converts the actual performance of a criterion to an artificial performance value that is dimensionless. The scale uses the same range of numerical values for all criteria, resulting in a uniform utility function. At the weighting step, the individual artificial performance values are multiplied by weights for the computation of an overall score for all criteria based on utility. These weights may be determined arbitrarily or with aggregated expert judgment using pairwise comparisons. Quantitative scores that do not have a measurable mitigation cost function are computed using this procedure and lead to the Sij scores in decision matrix A, whereas the qualitative scores are computed in a different manner. Qualitative scores typically represent experts’ judgments on the performance of each alternative Ai toward each qualitative criterion Cj. Such scores are obtained by assessing the relative benefit and negative impacts of each proposal and the scale of its effect. A utility function addresses these utility-based quantitative and qualitative scores and converts the values of real and physical performance Sij into a uniform and artificial performance Uij with no dimension. This resolves the issue of incommensurable units. Two types of utility functions are presented below.


Table 5. Example of performance indicators and criteria for the Airfield functional area Objective

Indicator

Index

Criteria

Unit

Â€Â€Â€Â€Â€Runways & taxiways C02 eq: Carbon dioxide equivalent (IPCC, 2007) C0: Carbon monoxide Â€Â€Â€Â€Â€NOx: Nitrogen Oxides

S0x: Sulfur oxides VOC: Volatile Organic Compounds PM: Particulate Matter

Â€Â€Â€Â€Â€Light colored and high albedo materials: reflectance to be defined 1. Reduce taxiing distances and times

2. Distance emissions from residential areas

3. Reduce heat islands to minimize impact on microclimate

Level 1:Aircraft vehicle miles traveled (VMT)

Q

QUANT

mi.

Level 2: Aircraft emissions (global warming)

P

QUANT

g C02 eq

Level 3: Aircraft emissions (global warming) Aircraft emissions (air quality)

P

QUANT

g C02 eq g CO g NOx g S0x g VOC g PM

Level 1: Distance between emission sources and residential areas

Q

QUANT

mi.

Level 2: Distance between emission sources and residential areas weighted against emission intensity

Q

QUANT

mi. x g of pollutant

Percentage of impervious surfaces with shade or light colored/high albedo materials

Q

QUANT

%

Level 1: GSE VMT

Q

QUANT

mi.

Level 2: GSE emissions (global warming)

P

QUANT

g C02 eq

Level 3: GSE emissions (global warming) GSE emissions (air quality)

P

QUANT

g C02 eq g CO g NOx g S0x g VOC g PM

Level 1: Availability of aircraft parking with hydrant fueling

Q

QUAL

--

Level 2: Quantity of aircraft parking with hydrant fueling weighted by output

Q

QUANT

TBD

Level 1: Availability of aircraft parking with ground power outlet

Q

QUAL

--

Level 2: Quantity of aircraft parking with ground power outlet weighted by output

Q

QUANT

TBD

Number of households exposed to each noise level weighted by CNEL

Q

QUANT

Households x db

Availability of equipment for stiff approach landing

Q

QUAL

--

Performance and availability of de-icing runoff collection, treatment and reuse equipment

Q

QUANT

TBD

GSE 4. Reduce GSE emissions

5. Reduce fuel truck operations and risk of surface fuel spill

6. Reduce use of APUs and GPUs

Noise CNEL: Community Noise Equivalent Level expressed in decibels (db) 7. Limit aircraft noise exposure

De-icing 8. Limit pollution caused by aircraft deicing fluids

P: Pollution index; Q: Quality index; QUANT: Quantitative; QUAL: Qualitative; --: not available; TBD: to be determined

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Table 6. Decision matrix A before application of utility and cost functions Criteria Utility-based

Cost-based

Alternatives

C1

C2

…

…

Cm-1

Cm

A1

S11

S12

…

…

S1m-1

S1m

A2

S21

S22

…

…

S2m-1

S2m

…

…

…

…

…

…

…

An

Sn1

Sn2

…

…

Snm-1

Snm

Box 1. Sample procedure Global Warming and Air Quality: Aircraft and GSE VMT and Emissions Basic analysis: Level 1 indicators The simplest scoring procedure states the hypothesis that emission factors for aircraft and GSE do not vary between evaluated alternatives. The suggested procedure is inspired by Chester (2008). Input data: Forecasted airport schedule (Official Airline Guide), fleet mix, estimated GSE times-in-mode and master plan data for runway and taxiway layout and locations. Analysis steps: Simplify fleet mix using representative aircraft. Chester uses three representative aircraft for modeling commercial aircraft operation: Embraer 145 (short-haul), Boeing 737 (medium-haul), and Boeing 747 (long-haul). These aircraft represent the small, medium, and large aircraft each designed for specific travel distances and passenger loads. Estimate average GSE requirements and service time for each representative aircraft. Estimate average aircraft taxiing and GSE service VMT for each representative aircraft and general operational guidelines. Use values as criteria scores. Medium analysis: Level 1 indicators The basic analysis is enhanced by the consideration of emissions factors for representative aircraft as well as GSE equipment. A comprehensive list of GSE vehicles is mentioned in section 2 (U.S. EPA, 1999). This type of analysis is appropriate if other types of fuels are considered in certain alternatives. Complex analysis: Level 2 and 3 indicators The most sophisticated analysis investigates aircraft emissions generated throughout the entire landing/take-off (LTO) cycle (approach, landing, taxi-in, taxi-out, take-off and climb-out), aircraft activity using auxiliary power units (APUs) as well as GSE emissions for equipment operating on all major roadways, parking facilities and curbsides on the airport property1. Input data: SIMMOD Analysis for total operations, fleet mix obtained from gate modeling information, operating times and characteristics and master plan data for gate layout and locations. Scores are obtained using the FAA’s Emissions and Dispersions Modeling System (EDMS) which calculates emissions for both aircraft and GSE and contains emission factors for common equipment types. (FAA, 2009).

1. Utility Function of a Crooked Linear Form Tsamboulas and Kopsacheili (2003) developed utility functions for deriving quantitative criteria scores in their methodological framework for the strategic assessment of transportation policies. With regard to the present methodology, this procedure applies specifically to treatment of quantitative values that are not addressed by the cost function procedure. For scores that are defined

410

on an absolute scale, we introduce Pij, the physical performance of criterion j measured as a change— compared to the original situation or relative to set targets—and not as an absolute value. All absolute scores Sij are converted to relative performance for the purpose of using the crooked linear utility function. For each criterion, a utility function is created and enables the conversion of the score from a physical scale (Pij relative performance) to an artificial scale (Uij utilities) ranging from -1 to 1 where -1 depicts the worst scenario, 0 the


Table 7. Example of artificial utility scale (Tsamboulas & Kopsacheili, 2003) Type of impact

Score

Strong negative impact

-1

Large negative impact

-0.75

Moderate negative impact

-0.5

Small negative impact

-0.25

No impact

0

Small positive impact

+0.25

Moderate positive impact

+0.5

Large positive impact

+0.75

Strong negative impact

+1

absence of impact and +1 the best scenario. The utility function of a crooked linear form adapted from Tsamboulas and Kopsacheili is as follow: +Pij / A  U ij =  0  −Pij / B

if Pij > 0 if Pij = 0 if Pij < 0

where Cj = criterion j, Pij = physical and real performance of criterion j measured as a change and not as an absolute value, Uij = artificial performance of criterion j, A,B = constant variables that either depend on measurement thresholds or are set by â†œrelevant decision makers.

2. Utility Function with Defined Artificial Impact Scores The physical performance Pij of purely qualitative criteria is expressed verbally. There is no need for a mathematical utility function as the information reported by the indicator is not quantitative. Tsamboulas and Kopsacheili (1999) proposed an artificial scale of utility scores that correspond to verbal description as set forth below in Table 7. Note that the scale also converts performance values to utility values ranging from -1 to +1. Inclu-

sion in the final decision matrix is done similarly as with the crooked linear utility function. Both forms of utility function produce artificial scores that will be aggregated with qualitative weighting or no weighting at all.

Weighting Using Cost Functions We propose an evaluation concept of certain quantitative criteria using cost functions in an attempt to overcome the objectivity limitations of utility-based and qualitative methods. In contrast to utility functions that occur at the scoring stage, cost functions apply to the development of weights in the next stage. They stem from the assumption that all negative impacts incurred by a selected alternative should be mitigated at a certain cost. It is of course the case that any form of development demands resource consumption and results in the degradation of the natural environment. The cost function is applied at the weighting step. Quantitative criteria are based on specific indicators with dedicated units. Scoring may thus be done purely quantitatively using procedures similar to those in EIAs. The cost function concept developed here stems from the assumption that negative environmental impacts that cannot be avoided will have to be mitigated at a certain cost. Airport developers would therefore choose the alternative with the lowest mitigation cost

411


to ensure that its consequences are offset with a minimal budget. This will hold particularly true in the forthcoming decades as even stronger accountability will be required by airports in their management of environmental issues. For instance, it is common practice for airports to mitigate the noise due to aircraft operations with programs that improve the acoustic insulation of neighboring residential areas; airports have also recently participated in efforts to become carbon neutral by purchasing carbon offsets (ACI, 2009a). While the cost of offsetting such impacts will be subject to debate, we maintain that it is easier and more objective to score environmental criteria in this manner than using preferences defined by the subjectivity of individual experts. Specific impact levels are hard to determine as some effects occur at a global level. Therefore, weighting impacts according to their mitigation costs seems adequate. The use of a monetary evaluation simultaneously solves the problem of incommensurable units and allows a simple aggregation of scores using a linear additive function. The cost function is used to produce criteria weights that reflect the mitigation cost of a particular environmental effect. The actual performance of the criterion is kept and multiplied by the weight. Let A = {Ai, for i = 1,2,…,n} be the finite set of alternatives that are evaluated. We consider a set of criteria that are quantitative and for which mitigation costs are assessed. Let C = {Cj, for j = 1,2,…,m} be this finite set of criteria. At the scoring step, each criterion Cj is assigned a score Sij for each alternative i. These scores are expressed in the particular units of each criterion, preventing aggregation. To overcome this issue, we introduce a mitigation cost function c that computes a weight Wj for each score Sij. The score is initially expressed in the unit specific to each indicator. The score is then multiplied by a weight expressed in currency per indicator unit. The resulting product is expressed in currency for all the concerned criteria, allowing their aggregation into one overall performance value.

412

This weight Wj represents the cost for mitigating the impact caused by one single unit of the score Sij. The aggregated score of all cost-based criteria is CPi, the cost performance of alternative i and it is given by: j

CPi = ∑ Sij ⋅ Wj j =1

The methodology for estimating the costs of environmental impacts caused by airport development is often the subject of vibrant debate and little research on the topic has been produced as yet. The methodology proposed here defines mitigation cost as the monetary amount paid by airport developers and authorities for the purpose of offsetting direct environmental impacts of their development activity. There are, however, arguments for considering the costs incurred by indirect impacts on a much larger scale, such as long-term health and social consequences to society. We choose to restrict the methodology to the first definition for two reasons. First, there is little understanding of, and evaluation procedures for, the financial burden of indirect impacts. For instance, there is as yet no consensus as to the consequences of global warming or heat islands. Second, our goal in developing this method is to encourage airport planners and designers to achieve greener airport design. Using direct mitigation costs directly influences the budget of the project and thus creates an inherent incentive for decision makers to limit mitigation needs as this also minimizes expenses. The strategy of first avoiding, then minimizing, and finally mitigating impacts only if they could not be avoided or minimized, ensures that mitigation is the last resort. Although airport authorities do have the social responsibility to address the consequences of their activity to society in general, we believe it is premature to include such social costs in the method as the computation of accurate metrics is currently not possible.


The cost function develops weights that convert scores expressed in different units into an overall score expressed in uniform monetary terms. Sij scores considered for the cost function must be expressed in units of impacts that can be directly quantified economically from a mitigation perspective. There is no artificial performance value in this case. The decision matrix A remains unchanged, and weights are used at the aggregation stage. The mitigation cost function c is defined as follows:

dresses this issue by assuming that all negative impacts will have to be mitigated at a certain cost. The optimal alternative would therefore be the one that minimizes the overall mitigation costs. In certain cases, specific thresholds are not to be exceeded in order to comply with safety and health requirements. Our methodology acknowledges this by allowing for environmental limits to be included in the evaluation process by allowing for the inclusion of Critical Threshold Values (Table 8, Table 9).

c : S → W : c(S j ) = Wj

Aggregation and Ranking

with j = 1,2,..m the number of criteria, S the set of physical performances and W, the set of weights representative of mitigation costs. The key theoretical concept of this chapter is the use of cost functions to derive weights for quantitative criteria. Such cost functions must be defined on a case-by-case basis by analyzing historical mitigation costs on the same airport compound or at other airport developments of comparable characteristics. In this chapter, we present an initial numerical example (Box 2) for the weighting of aircraft emissions to illustrate this process. This procedure can be similarly applied to other impacts such as noise and wildlife. Mitigation costs for noise typically include compensations paid to neighboring communities for improving housing acoustic insulation. Wildlife mitigation costs often enable the development of endangered species protection program onsite, their relocation offsite or the sponsorship of other wildlife protection programs. Data for a variety of mitigation measures are relatively accessible by end-users of the method. Users should also be aware that measures to reduce environmental hazards may have negative side effects. For example, technical measures to reduce GHG emission from airplanes may increase NOx emissions and noise. Our methodology ad-

The last step of our evaluation method is the integration of all previous steps for the selection of the most environmentally sustainable option. The core method uses a weighted additive procedure for the aggregation of individual scores and the ranking of alternatives. End-users may take advantage of the method’s flexible structure by computing sub-rankings for particular criteria clusters in order to assess the performance of alternatives under specific criteria. Weights determined using the cost function paradigm are directly used in the last step whereas for the other criteria, end-users can choose between not using weights (i.e. all criteria being equal with weights equal to 1) or determining arbitrary weights on a case-by-case basis to respond to local challenges, threshold values, stakeholder pressure, etc. If the number of criteria is limited, pairwise comparisons may be used to limit the possibility of biases. The final decision matrix (Table 10) with its associated weights becomes: The aggregated performance of the evaluated system is defined by two values. The first is the utility performance UPi of alternative i and defined as the weighted sum of utility values Uij for all utility-based criteria with the weights Wj determined arbitrarily. The second is the cost performance CPi of alternative i and defined as the weighted sum of physical and quantitative scores

413


Box 2. Numerical example This example develops the cost function for Indicator (level 2): Aircraft emissions (global warming). This is criteria number 1 and is expressed in grams of CO2 equivalents (CO2 eq). The purpose of the cost function is to convert this score to a monetary value expressed using US dollars (USD). In accordance to guidelines set out by the Intergovernmental Panel on Climate Change (2007), GHGs emissions are expressed in CO2 eq, which are calculated as a weighted sum of nominal emissions of various gas species using gas-specific global warming potentials of 1 (CO2), 21 (CH4), 310 (N2O), 6500 (CF4), 9200 (C2F6), 1300 (HFC-134a) and 23900 (SF6). Airport authorities, such as the Port Authority of New York and New Jersey, purchase carbon credits to offset GHGs emissions and therefore meet regulatory carbon emission allowances (PANYNJ, October 23, 2008). One carbon credit is equal to one metric ton of carbon. Markets are used to allocate these regulated emissions. As of August 2009, the European Energy Exchange (2009), the leading energy exchange in Central Europe, lists a price of approximately 20 USD per carbon credit. Yale University economics professor William Nordhaus (2008) however argues that the price of carbon needs to be high enough to encourage changes in behavior and economic production systems to effectively limit emissions of GHGs. Nordhaus has suggested, based on an estimate of the social cost of carbon emissions, that an optimal price of carbon should be approximately 30 USD in 2008 US dollars. We choose to use a price of 30 USD per carbon credit in this example. The mitigation cost function for criteria 1 is thus:

c(S1 ) = 30 USD / metric tons CO2eq = W1 We consider three alternatives A1, A2 and A3 for the development of a typical airport. GHGs emissions are computed using emissions factors for Jet A fuel and aviation gasoline (Table 8)

Table 8. GHG emission factors CO2

N2O

CH4

Units

Jet A

21.095

0.000188

0.00052

lb/gallon

Aviation Gasoline (AvGas)

18.355

0.000188

0.00052

lb/gallon

(IPCC, 1996; U.S. EIA, 2009)

Table 9. Numerical example results A1

A2

A3

Aircraft emissions [metric tons CO2 eq]

110,832

125,098

144,231

Weights based on mitigation cost [USD per metric ton of CO2 eq]]

30

30

30

Weighted score [USD]

3,324,960

3,752,940

4,326,930

Table 10. Final decision matrix A Criteria Utility-based

Cost-based

Alternatives

C1

C2

…

…

Cm-1

Cm

A1

U11

U12

…

…

S1m-1

S1m

A2

U21

U22

…

…

S2m-1

S2m

…

…

…

…

…

…

…

An

Un1

Un2

…

…

Snm-1

Snm

W1

W2

Wm-1

Wm

Arbitrary weights

Cost-based weights

414


Sij with mitigation cost-based weights Wj determined using a cost function. j

j

j =1

j =1

UPi = ∑U ij ⋅ Wj CPi = ∑ Sij ⋅ Wj Two rankings of alternatives emerge from these performance values—one that is utility-based and one that is mitigation-cost based. End-users can consider these two rankings independently to analyze the specific performance of each alternative for the two groups of criteria. Otherwise, they may combine rankings in a weighted sum or by simply adding them. Both cost and utility-based procedures produce two separate rankings of alternatives. End-users have the choice to consider these rankings separately for discussing their final decision or combine them into an overall score, with or without weights that best reflect their concerns. Combining rankings instead of actual scores overcomes the issue of heterogeneous units—cost functions produce scores in monetary units while utility functions use dimensionless quantities. In our opinion, the combination of mitigation cost functions and utility functions with separate rankings brings a higher level of objectivity compared to other methods while at the same time remaining reasonably simple enough to incorporate stakeholders’ input and implement in a real-life situation. It is clear that the definition of utility and cost functions will be the matter of much debate among experts and stakeholders. End-users will do well to acknowledge this challenge and understand that in the first implementation steps, qualitative procedures will be favored.

FUTURE RESEARCH DIRECTIONS Current regulatory environmental impact assessments analyze in significant depth the breath of environmental issues incurred by a project. However,

these highly scientific and data-intensive studies often fail to consider stakeholder concerns in an approachable manner. Currently, airport authorities essentially assume a media role by focusing on making information available—information not easily accessible by the general public due to the high register of its technical language and the intimidating length of the impact studies. The absence of a dialogue means that airport planners do not receive sufficient feedback to adequately address the concerns of all interested parties. While the method presented here is not meant to compete with the thoroughness of impact studies, it is nevertheless intended to address the lack of dialogue inherent in the complexity of such studies. An innovative application of these theoretical considerations derives from the observation that breakthroughs in e-government—the use of information and communication technologies to provide and improve public-sector services, transactions, and interactions—have improved the service and efficiency of several governmental organizations throughout the world. Recent findings by McKinsey & Company (Baumgarten & Chui, 2009) argue that e-government applications along with adequate management structures have the potential to encourage participation from the general public in policy making. The advantage of leveraging such public attention is that this process may, in the end, give more legitimacy to policy decisions. Web 2.0 technologies, such as blogs, wikis, and mash-ups allowing users to participate in discussions and combine data from multiple sources, may thus facilitate a shift in the mind-set of airport planning authorities from a “publishing” frame of mind to a “sharing” one that embraces more user participation. Taking a similar approach, one can foresee the application of this evaluation method in the construction of an e-governance tool: an “Airport Environmental Dashboard”. Promoted by airport authorities and documented by planners and designers, the dashboard would be an online platform whose role is to bridge the current gap

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between project developers and the general public. The dashboard would give up-to-date information on the progress of an airport master plan and a real-time evaluation of the environmental sustainability of any design decision using the presented method. The content of the dashboard would be largely sourced from impact studies that are already widely published. These data would however be made available in a more structured and user-friendly format. Stakeholders would benefit from the dashboard in two ways: (1) they would obtain relevant and condensed information and follow the evaluation process as outlined in this paper, both in real-time and online, using a continuous data feed throughout the project, and (2) they could submit feedback and participate in the decision making process. The latter would also benefit authorities by allowing them to capture feedback and knowledge that they would not be exposed to otherwise.

CONCLUSION This chapter formulates the theoretical principles for the development and implementation of an evaluation method for the environmental sustainability of airport projects. Two fundamental goals have directed the research process: (1) to foster greener design practices among airport managers, planners, and designers, in acknowledging the responsibility of the industry to manage effectively the environmental consequences of its business, and (2) to establish a dynamic dialogue between all airport stakeholders as well as effectively and efficiently addressing their concerns, in ensuring capacity for development and overcoming the shortcomings of traditional environmental impact assessments. Concerns from the general public and stakeholders are indeed growing at such rate that they will soon prevent any form of expansion unless they are adequately and effectively managed.

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The methodology structures the evaluation of airport environmental sustainability with the following significant research findings: 1. A formal definition of the concept of airport environmental sustainability with a selection of impact categories and functional areas. 2. A flexible implementation strategy with further perspective in the development of an online dashboard. 3. A structure for the evaluation process using criteria clusters, objectives, and performance indicators. 4. A multi-criteria decision making approach with utility and cost functions for the scoring and weighting. The procedure allows the evaluation of a large number of alternatives and criteria, without the burden caused by pairwise comparisons. Further development has the potential to build a dynamic dialog that is truly beneficial to airport authorities, planners, and designers on one hand, and all stakeholders and the general public on the other, with a common ambition of achieving greener airport design and assuming responsibility for aviation’s role in the challenges of sustainable development.

ACKNOWLEDGMENT The authors would like to thank William Dunlay, C.F. Booth, and Holland Young of Jacobs Consultancy, Burlingame, CA, USA, for providing information on current industry needs and analysis data. The authors would like to thank Prof. Arpard Horvath and Dr. Mikhail Chester of the University of California, Berkeley for comments on earlier drafts, and Yves Rammer of the Université Libre de Bruxelles for advisorship on the research project.


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Douglas, I., & Lawson, N. (2003). Airport construction: Materials use and geomorphic change. Journal of Air Transport Management, 9(3), 177–185. doi:10.1016/S0969-6997(02)00082-0 EEX. (2009). European energy exchange. Retrieved August, 3, 2009, from http://www.eex.com FAA. (2006). FAA order 1050.1E, environmental impacts: Policies and procedures. Washington, DC: Federal Aviation Administration. FAA. (2009). Emissions and dispersion modeling system (EDMS). Retrieved June 2, 2009, from http://www.faa.gov/ about/ office_org/ headquarters_offices/ aep/ models/ edms_model/ Franssen, E. A. M., Staatsen, B. A. M., & Lebret, E. (2002). Assessing health consequences in an environmental impact assessment the case of Amsterdam airport Schiphol. Environmental Impact Assessment Review, 22(6), 633–653. doi:10.1016/ S0195-9255(02)00015-X GRI. (2009). A snapshot of sustainability reporting in the airports sector. Retrieved March 12, 2009, from http://www.globalreporting.org Guggemos, A. A., & Horvath, A. (2004). Framework for environmental analysis of commercial building structures. Construction Research. Heathrow, B. A. A. (2007). Heathrow and climate change. BAA. Humbert, S., Abeck, H., Bali, N., & Horvath, A. (2007). Leadership in energy and environmental design (LEED): A critical evaluation by LCA and recommendations for improvement. International Journal of Life Cycle Assessment, 12. IPCC. (1996). IPCC guidelines for national greenhouse gas inventories. Reference Manual, 3. IPCC. (2007). [The physical science basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change.]. Climatic Change, 2007.

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Lammers, P., & Gilbert, A. (1999). Towards environmental pressure indicators for the EU: Indicator definition. European Commission. LAWA. (2009). Sustainable airport planning, design and construction guidelines, version 4.0. Retrieved May, 4, 2009, from http://www.lawa. org/ uploadedFiles/ LAWA/ pdf/ Sustainable% 20Airport% 20PDC% 20Guidelines% 20Jan08. pdf Lenzen, M., Murray, S. A., Korte, B., & Dey, C. J. (2003). Environmental impact assessment including indirect effects—a case study using input–output analysis. Environmental Impact Assessment Review, 23(3), 263–282. doi:10.1016/ S0195-9255(02)00104-X Lippiatt, B. C., & Boyles, A. S. (2001). Using BEES to select cost-effective green products. The International Journal of Life Cycle Assessment, 6(2), 76–80. Nordhaus, W. (2008). A question of balanceweighing the options on global warming policies. New Haven, CT: Yale University Press. PANYNJ. (October 23, 2008). Press release: Port authority furthers initiative to become carbon neutral from its operations by 2010. The Port Authority of New York and New Jersey. Port of Seattle. (2007). Seattle-Tacoma international airport: Managing a green airport. Unpublished manuscript. Rakas, J., Teodorović, D., & Kim, T. (2004). Multi-objective modeling for determining location of undesirable facilities. Transportation Research Part D, Transport and Environment, 9(2), 125–138. doi:10.1016/j.trd.2003.09.002 Rowe,G.(2005). Sacramento international airport air quality improvement programs-green airport initiative.


Saaty, T. L. (2008). Decision making with the analytic hierarchy process. International Journal of Services Sciences, 1(1), 83–98. doi:10.1504/ IJSSCI.2008.017590 Triantaphyllou, E. (2000). Multi-criteria decision making methods: A comparative study. Dordrecht, The Netherlands/ Boston, MA: Kluwer Academic Publishers. Tsamboulas, D., & Kopsacheili, A. G. (2003). Methodological framework for strategic assessment of transportation policies: Application for Athens 2004 Olympic Games. Transportation Research Record: Journal of the Transportation Research Board, 1848(1), 19–28. doi:10.3141/1848-03

Upham, P., Thomas, C., Gillingwater, D., & Raper, D. (2003). Environmental capacity and airport operations: Current issues and future prospects. Journal of Air Transport Management, 9(3), 145–151. doi:10.1016/S0969-6997(02)00078-9 U.S. EIA. (2009). Voluntary reporting of greenhouse gases program (fuel and energy source codes and emission coefficients). Retrieved August, 3, 2009, from http://www.eia.doe.gov/ oiaf/ 1605/ coefficients.html U.S. EPA. (1999). Technical support for development of airport ground support equipment emission reductions. (No. EPA/420‐R‐99‐007). Washington, DC: U.S. Environmental Protection Agency, Office of Transportation and Air Quality.

Tsamboulas, D., & Mikroudis, G. (2000). EFECT– evaluation framework of environmental impacts and costs of transport initiatives. Transportation Research Part D, Transport and Environment, 5(4), 283–303. doi:10.1016/S1361-9209(99)00038-3

USGBC. (2007). Press release: USGBC announces alignment, harmonization of LEED rating system. Retrieved July, 1, 2009, from http:// www.usgbc.org/ News/ PressRelease Details. aspx?ID=3261

Tsamboulas, D., Yiotis, G., & Panou, K. (1999). Use of multicriteria methods for assessment of transport projects. Journal of Transportation Engineering, 125, 407. doi:10.1061/(ASCE)0733947X(1999)125:5(407)

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Upham, P., & Mills, J. N. (2005). Environmental and operational sustainability of airports: Core indicators and stakeholder communication. Benchmarking: An International Journal, 12(2), 166–179. doi:10.1108/14635770510593103 Upham, P., Raper, D., Thomas, C., McLellan, M., Lever, M., & Lieuwen, A. (2004). Environmental capacity and european air transport: Stakeholder opinion and implications for modelling. Journal of Air Transport Management, 10(3), 199–205. doi:10.1016/j.jairtraman.2003.10.016

Vreeker, R., Nijkamp, P., & Ter Welle, C. (2002). A multicriteria decision support methodology for evaluating airport expansion plans. Transportation Research Part D, Transport and Environment, 7(1), 27–47. doi:10.1016/S0969-6997(01)000059 Winston, W. L. (1994). Operations research: Applications and algorithms (3rd ed.). Belmont, CA: Duxbury Press.

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ADDITIONAL READING Bare, J. C., Norris, G. A., Pennington, D. W., & McKone, T. (2002). The tool for the reduction and assessment of chemical and other environmental impacts. Journal of Industrial Ecology, 6(3-4), 49–78. doi:10.1162/108819802766269539 Chester, M. V. (2008). Life-cycle environmental inventory of passenger transportation modes in the united states. Berkeley: University of California. City of Chicago OMP. (2003). O’Hare modernization program: Sustainable design manual. Retrieved May, 4, 2009, from http://egov. cityofchicago.org/ webportal/ COCWebPortal/ COC_EDITORIAL/ OMPSustainabledesign ManualCopywrite2003 cityofChicago.pdf Douglas, I., & Lawson, N. (2003). Airport construction: Materials use and geomorphic change. Journal of Air Transport Management, 9(3), 177–185. doi:10.1016/S0969-6997(02)00082-0 GRI. (2009). A snapshot of sustainability reporting in the airports sector. Retrieved March, 12, 2009, from http://www.globalreporting.org Guggemos, A. A., Horvath A. (2004). Framework for environmental analysis of commercial building structures. Construction Research 2003, Hendrickson, C., Horvath, A., Joshi, S., & Lave, L. (1998). Economic input-output models for environmental life-cycle assessment. Environmental Science & Technology, 32(7), 184. doi:10.1021/ es983471i Humbert, S., Abeck, H., Bali, N., & Horvath, A. (2007). Leadership in energy and environmental design (LEED): A critical evaluation by LCA and recommendations for improvement. International Journal of Life Cycle Assessment, (12) Junnila, S., & Horvath, A. (2003). Life-cycle environmental effects of an office building. Journal of Infrastructure Systems, 9, 157. doi:10.1061/ (ASCE)1076-0342(2003)9:4(157)

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LAWA. (2009). Sustainable airport planning, design and construction guidelines, version 4.0. Retrieved May, 4, 2009, from http://www.lawa. org/ uploadedFiles/ LAWA/ pdf/ Sustainable% 20Airport% 20PDC% 20Guidelines% 20Jan08. pdf Lenzen, M., Murray, S. A., Korte, B., & Dey, C. J. (2003). Environmental impact assessment including indirect effects—a case study using input–output analysis. Environmental Impact Assessment Review, 23(3), 263–282. doi:10.1016/ S0195-9255(02)00104-X Lippiatt, B. C., & Boyles, A. S. (2001). Using BEES to select cost-effective green products. The International Journal of Life Cycle Assessment, 6(2), 76–80. Triantaphyllou, E. (2000). Multi-criteria decision making methods: A comparative study. Dordrecht Boston Mass.: Kluwer Academic Publishers. Tsamboulas, D., & Kopsacheili, A. G. (2003). Methodological framework for strategic assessment of transportation policies: Application for athens 2004 olympic games. Transportation Research Record: Journal of the Transportation Research Board, 1848(-1), 19-28. Tsamboulas, D., & Mikroudis, G. (2000). EFECT– evaluation framework of environmental impacts and costs of transport initiatives. Transportation Research Part D, Transport and Environment, 5(4), 283–303. doi:10.1016/S1361-9209(99)00038-3 Tsamboulas, D., Yiotis, G., & Panou, K. (1999). Use of multicriteria methods for assessment of transport projects. Journal of Transportation Engineering, 125, 407. doi:10.1061/(ASCE)0733947X(1999)125:5(407) Upham, P., & Mills, J. N. (2005). Environmental and operational sustainability of airports: Core indicators and stakeholder communication. Benchmarking: An International Journal, 12(2), 166–179. doi:10.1108/14635770510593103


Upham, P., Raper, D., Thomas, C., McLellan, M., Lever, M., & Lieuwen, A. (2004). Environmental capacity and european air transport: Stakeholder opinion and implications for modelling. Journal of Air Transport Management, 10(3), 199–205. doi:10.1016/j.jairtraman.2003.10.016 Upham, P., Thomas, C., Gillingwater, D., & Raper, D. (2003). Environmental capacity and airport operations: Current issues and future prospects. Journal of Air Transport Management, 9(3), 145–151. doi:10.1016/S0969-6997(02)00078-9 Vincke, Ph. (1992). Multicriteria decision-aid. New York: Wiley.

KEY TERMS & DEFINITIONS Airports: Transportation facility that accommodates the take-off and landing of commercial aircraft and that typically comprises airside and landside infrastructure. Environmental evaluation: Assessment of the advert impacts of an infrastructure system on the natural environment and human health. Performance indicators: Parameters that reflect the environmental performance of a complex system toward specific criteria. Multi-criteria analysis: Decision-making tool aimed at supporting decision makers facing numerous and conflicting evaluations.

Cost function: Mathematical function that converts scores expressed in incommensurable units into an overall score expressed in uniform monetary terms. Utility function: Mathematical function that converts the values of real and physical performance scores into a uniform and artificial performance with no dimension. Life-cycle analysis: Method for the systematic environmental assessment of a project, from raw material extraction through construction and use to end-of-life management.

ENDNOTE 1

Aircraft need a power source at the gate to maintain electronic systems and pneumatic pressure for air conditioning. Aircraft typically use a portable ground power unit (GPU) or run an onboard auxiliary power unit (APU) which is a small turbine engine inside the fuselage. Rowe (2005) argued that a Boeing 737 APU burns 34 gallons of jet fuel/hour, emits exhaust on the airport ramp, and is noisy. A typical LTO cycle of 15-26 minutes burns 12 to 17 gallons of jet fuel if the APU is used the entire time. If 100 aircraft per day eliminated the use of the APU, there would be a NOx reduction of 10 tons/year.

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Chapter 22

A Conceptual Model for Greening a Supply Chain through Greening of Suppliers and Green Innovation H. K. Chan University of East Anglia, UK T.-Y. Chiou University of East Anglia, UK F. Lettice University of East Anglia, UK

ABSTRACT Nowadays, more organisations are focusing on how to improve their environmental performance, partly driven by recent regulations in this area. This means that green supply chain management plays an important role over traditional supply chain management. Companies could gain competitive advantage through the proper management of their supply chain activities, for example, purchasing management. In fact, organisations can now generate more business opportunities than their competitors by addressing environmental management successfully. More specifically, it has been identified that implementation of green innovation can become a company’s order winner. However, not many studies have investigated the relationships between the greening of suppliers, green innovation, environmental performance and competitive advantage. The objective of this article is to propose a conceptual model, developed from a review of relevant literature and performance indicators, and to identify how future research can address these issues.

INTRODUCTION Rapid technological advancement has made life more convenient, but has also resulted in increasDOI: 10.4018/978-1-60960-531-5.ch022

ingly shorter product life cycles. Consequently, as products are replaced and disposed of more frequently, there are negative impacts on the environment, such as more waste. One of the most effective ways to tackle such environmental problems is to focus on waste prevention and


A Conceptual Model for Greening a Supply Chain through Greening of Suppliers and Green Innovation

control at the source through green procurement (Min and Galle, 1997). More importantly, welldesigned environmental standards can increase producers’ incentives to adopt green product and technological innovation (Shrivastava 1995). As a matter of fact, some of the leading international organisations have developed their own environment management systems and criteria to motivate their suppliers. For example, Sony’s “Green Partner Standards” (Sony Corporation, 2009), and HP’s supply chain social and environmental responsibility (Hewlett-Packard, 2008). Avery (1995)’s study found that in 1993 only 40% of 1000 buyers of office equipment and supplies in the UK were taking part in environmental initiatives within their organisation, but the figure had soared to 80% in 1995. It is therefore becoming very important for organisations to adopt green innovation and implement Green Supply Chain Management (GSCM) within their value chain (Steger, 1993). Rao and Holt (2005) conducted empirical research and found a positive relationship between GSCM practices and competitiveness and economic performance. In general, organisations can further reduce production cost and increase their economic efficiency through such initiatives (Porter, 1991). Furthermore, improvement in corporate environmental performance and compliance with environmental regulations can contribute to a company’s competitiveness (Bacallen, 2000). The implementation of GSCM has been found to contribute towards corporate competitiveness and environmental performance by a number of authors (e.g. Rao, 2002; Tukker et al., 2001; Cairncross, 1992; Hart, 1995; Schmidheiny, 1992; Shrivastava, 1995; Poter and Linde, 1995; Vermulen, 2002). GSCM can be broadly classified into external and internal environment management (Rao, 2002). In terms of external environment management, it is related to the greening of suppliers (Bowen et al., 2001; Lloyd, 1994; Rao, 2002; Hamner, 2006; Makower, 1994; Green et al, 1998; Rajagopal and Bernard, 2006). Internal

environment management can be reflected by green innovation, which can also be divided broadly into product and process innovations (Klassen and Whybank, 1999; Porter and Van der Linde, 1995; Hart, 1995; Schmidheiny, 1992). Green innovation has not been addressed well in the green supply chain management literature in spite of the fact that it can create a competitive advantage for firms (Porter and Van der Linde, 1995; Chen et al., 2006). In addition, not many studies have investigated the relationship between the greening of suppliers, green innovation, environmental performance and competitive advantage. The objective of this article is thus to propose a conceptual model, based on a review of relevant literature and performance indicators on the factors discussed above, to identify areas for future research. The rest of this paper is organised as follows. The next section reviews relevant literature on the factors discussed above, namely, the capability of greening the supplier, the capability of green innovation, competitive advantage and environmental performance of firms. Moreover, the indicators of the above factors are reviewed as well. Then, a conceptual framework is proposed which aims to study the relationships between these factors. Finally, the conceptual model and literature review are used to identify where future research is needed in this area.

BACKGROUND: A REVIEW OF KEY FACTORS Green Supply Chain Management (GSCM) Recently, industrial practitioners have recognised the concept of GSCM as selecting suitable suppliers, who are qualified to meet the environmental directives or a company’s internal green design standards, for enhancing their environmental performance. Cousins et al. (2004) pointed out that

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this philosophy has become an important aspect of an organisation’s strategic plan, but has also had a direct effect on the procurement department or even the whole organisation. Furthermore, there are a growing number of large and multinational organisations which have been developing environmental programs and have been focusing on innovating green products in order to achieve sustainable competitive advantage. IBM, for example, has a reuse and recycling programme for its products in 35 different countries and has not only reduced waste, but also saved US$2.9 million after implementing the programme (Teague, 2005). Other leading electronic companies, including HP, Dell, Motorola, Sony, NEC, Fujitsu, Panasonic and Toshiba have adopted GSCM as a proactive strategy after EU environmental directives were enacted (Zhu and Sarkis, 2006). In contrast, small and medium enterprises (SMEs) have faced difficulties in implementing GSCM as most of these companies are lacking technical and financial incentives (Sarkis 2001; Noci and Verganti, 1999). There are many driving forces for GSCM. For example, Rao (2006) proposed 14 motivators and driving forces for GSCM, namely, customer pressure, avoid potential export limitations, environmental improvement, reduced operating costs, increased productivity and quality, capturing workers’ knowledge, improved relations with authorities, improved relations with communities, enhanced brand image and reputation, competitiveness, Corporate Social and Environmental Responsibility, access to capital, financial performance, improvement and increase in market

share. One narrow definition of GSCM can be given as green purchasing across the whole supply chain from upstream suppliers, manufacturers, to downstream customers and reverse logistic (Zhu and Sarkis, 2004). Those green purchasing activities include strategic environmental sourcing, supplier development programs, supplier selection for environmental sourcing and supplier assessment metrics (Sroufe, 2006). Zhu and Geng (2006) estimated that purchased inputs for a manufacturer account for an overall value of 60% in all product costs and 50% of the quality problems. Consequently, green purchasing plays an important role for reducing environmental impacts across the whole product life cycle. As discussed in the preceding section, GSCM comprises of internal and external environmental management (Rao and Holt 2005). In terms of external environmental management, it includes green purchasing and cooperation with customers, environmental requirements, investment recovery, and eco-design practices. These approaches include some of the main internal and external activities and functions in a company’s supply chain management. There is a consensus that internal environmental management is a key factor to improve organisational performance (Carter et al., 1998). The interpretation of GSCM from different authors discussed so far is summarised in Table 1. In this article, internal environmental management is referred to as green innovation which will be discussed later, and external environmental management is defined as the greening of suppliers, which will be discussed in the next sub-section.

Table 1. Interpretation of GSCM

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Author

Years

Interpretation

Carter et al.

1998

Â€Â€GSCM is a key factor to improve organisational performance

Zhu & Sarkis

2004

Â€Â€ GSCM can be classified as green purchasing to integrate the whole supply chain flowing from upstream and downstream suppliers, manufacturers, customers and reverse logistics

Rao & Holt

2005

Â€Â€GSCM includes internal and external environmental management.


The Greening of Suppliers The greening of suppliers is an important aspect in an external environmental supply chain system. Walton et al. (1998) considered that this is the process of integration into environmental management systems. They suggested that environmental issues are becoming part of strategic planning in organisations because of tightened environmental regulations and increasing concern about environmental issues from customers. As a result, long-term strategic advantage can be developed by working closely with suppliers (Rajagopal and Bernard, 2006). A partnership working and appraisal system is required to achieve this objective (Sroufe, 2006). It involves a significant change in attitudes by the companies who want to establish closer supplier relationships. Companies may need to provide guidance, advice and assistance, and even share their knowledge and skills about environmental management with their suppliers. More importantly, working closely with suppliers in early product design and development stages contributes substantial benefits to competitive advantage in the global market. B&Q, for example, has refined and tightened its green supply policy with a new mission statement and a new supplier assessment system, namely, QUalityEthics-SafeTy (QUEST) (Green et al., 1998). The new system rates suppliers as A, B, C, D or E, based on ten environmental principles. Any suppliers who cannot pass the minimum requirements according to the new system (i.e. those with poor environmental performance) will not be able to produce any products for B&Q until the problems have been resolved. This QUEST system not only helps B&Q offer products with a guaranteed level of quality, but also reduces their environmental impact through collaboration with suppliers. Bowen et al. (2001) derived three main types of green supply. The first type includes greening the supply process that represents adaptations to suppliers’ management activities, and collaboration with suppliers to eliminate packaging and

to implement recycling initiatives, for example. The second type is product-based green supply, which attempts to manage the by-products of supplied inputs such as packaging. The third type is advanced green supply, which includes more proactive approaches such as using a set of environmental criteria in risk sharing, evaluation of buyer performance and joint development of cleaning technology or programs with suppliers. Based on this study, the first and the third type of green supply focus on close collaboration with suppliers. Greening the supply chain is a relatively new concept to many companies in South East Asia. In general, these companies achieve this through partnerships and mentoring systems (Rao, 2002). Rao (2002) identified that many large and medium sized companies in Taiwan have coordinated transactions between upstream suppliers and downstream buyers to implement environmental management practices in order to improve environmental performance. Rao (2002) also discussed how some large companies have established their environmental standards within their suppliers. For example, Ford Motor Company not only requires their suppliers to obtain a third-party certification for their environmental management system (EMS), but also organises technical seminars and training for their suppliers in order to help them to establish their own environmental management systems and improve their environmental performance (Rao, 2002). Table 2 indicates the importance of the supplier and green supply chain from key studies on the topic. In order to achieve green supply chain effectively and successfully, Rao (2002) suggested that organisations need to develop a long-term strategic relationship with their suppliers. There are other researchers such as Hamner (2006) who showed that many buyers can solve environmental problems and improve environmental performance by educating their suppliers about environmental issues and working closely with suppliers to implement environmental manage-

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Table2. Importance of greening the supplier Author

Years

Importance

Rajagopal & Bernard

2006

Â€Â€Â€In order to reduce negative impact on natural environment, working with suppliers is a long-term strategic advantage.

Rao

2002

Â€Â€Â€Working with suppliers to improve environmental performance.

Sroufe

2006

Â€Â€Â€Due to the new environment regulations, it requires a co-operative relationship and a close look at the supplier’s operations to determine whether it can ensure the necessary level of quality

Table 3. Initiatives of greening the supplier Author Rao Rao and Holt

Years

Initiatives

2002 2005

Â€Â€Â€1. Holding environmental awareness seminars for suppliers, 2. Guiding/helping suppliers to establish their own environmental programs, 3. Bringing together suppliers in the same industry to share their knowledge and problems, 4. Informing suppliers about the benefits of environment-friendly production technologies, 5. Urging suppliers to take environmental actions, 6. Choice of suppliers by environmental criteria, 7. Requiring suppliers to adopt environment friendly practices, 8. Arranging funds to help suppliers with their environmental programs, 9. Sending company auditors to appraise environmental performance and ensure compliance of suppliers.

ment systems. Rao (2002) and Rao and Holt (2005) also indicate that greening the supplier includes nine initiatives, that can help their suppliers and contractors to implement GSCM and improve their performance. These are summarised in Table 3.

Green Innovation In recent years, customers have shown increasing concern and awareness of environmental problems. In response, governments and Non Government Organisations (NGO) have developed and supported stringent environmental legislation and increasing disposal costs, which has enabled the development of new green technologies or innovation related to product and process designs. Environmental regulations have also driven the companies to implement ‘green’ technological innovations such as clean production equipment and process or green product innovation (Chen, 2008). Therefore, senior management need to incorporate environmental issues within their company strategies in order to enhance the green image of their products and services. As a result, companies have had to focus on how to reuse, re-

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manufacture and recycle their product throughout the whole product life cycle. Many studies have identified that product and process technologies are a critical driver of boosting environmental performance for manufacturing operations (Cairncross, 1992; Hart, 1995; Schmidheiny, 1992). Klassen and Whybank (1999) classified green innovation into two key categories: product design and process. From the product design perspective, they considered that green product innovation includes the process to modify an existing product’s design in order to reduce any negative impact on the environment during any stage of a product life cycle. Moreover, Klassen and Whybank (1999) defined green processes as the fundamental changes to the manufacturing process that reduce any negative impact on the environment during material acquisition, production, and delivery. In some studies, environmental technologies and innovations are regarded as a tool to limit or reduce the negative impact of a product or service on the environment (Shrivastava, 1995; Hellström, 2007). Nevertheless, Porter and Van Der Linde (1995) have proposed that the potential advantage of adopting these technologies can contribute to


Table 4. Key aspects of green innovation Author

Years

Key Aspects

Porter and Linde

1995

Â€Â€Â€Green innovation includes clean production equipment and process or green product innovations.

Klassen & Whybank

1999

Â€Â€Â€The authors classified green innovation according to product design and process aspects

Zhu & Sarkis

2004

Â€Â€Â€Internal managers’ support is one of the key driving forces for internal environment management practices (green managerial innovation)

Table 5. Indicators of green innovation and green technologies Author

Years

Green innovation and technologies indicator

Simon

1992

Â€Â€1. Reduced raw material, use high recycled content. 2. Non-polluting manufacture/non-toxic materials (CFCS, de-linking solvents, etc). 3. Low energy consumption during production/use/disposal. 4. Minimal or no packaging. 5. Reuse/refillability. 6. Long useful life, updating capacity (office machines). 7. Postconsumer collection/disassembly system (cars). 8. Remanufacturing capability

Klassen & Whybank

1999

Â€Â€1. Pollution prevention technologies 2. Pollution control technologies, which are like pollution prevention technologies, but more focus on pollution control technologies such as the treatment or disposal of pollutants or harmful by-products at the end of a manufacturing process. 3. Pollution management system.

competitive advantage. Furthermore, it is very important to point out that getting top management support is one of the key drivers for successful implementation of innovation (Hamel and Prahalad, 1989). Similarly, Zhu and Sarkis (2004) have found that getting commitment from top or middle level managers, at least for the Chinese manufacturing industry in their research, has a significant influence on the implementation of a successful internal environment management practices. Therefore, green innovation can also be underpinned by green managerial innovation. Table 4 illustrates some key aspects of green innovation from these different authors. Regarding the indicators for measuring green innovation, Simon (1992) developed eight green innovation indicators that can measure how green a product is, as listed in Table 5. Companies can gain competitive advantage and improve environmental performance by developing green product innovations and implementing internal process and managerial innovations to reduce the negative impact on the environment. In terms of green innovation technologies, Klassen and Whybank (1999) classified three technologies

and they are also listed in Table 5. These technologies are designed to reduce emissions before discharge and to improve product quality and increase productivity.

Environmental Performance Many organisations now consider environmental issues for their business activities to improve their environmental performance. Vermulen (2002) mentioned that most organisations have improved their environmental performance by taking advantage of clean production methodologies and by implementing the principles of environmental management into their activities. The environmental performance of a company can be evaluated by the degree of waste minimisation within its own plant and also the initiatives and ability to work with its suppliers. Tukker et al. (2001) suggest that there are three approaches to improve a company’s environmental performance. The first one focuses on applying or adding cleaning technologies, wastewater treatment and treatment of hazardous waste to the existing processes. However, these activities are expensive

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and may cause other environmental problems. The second one focuses on the improvement of environmental performance by using pollution prevention activities such as good housekeeping, process improvements, waste management, etc. The last one is related to how companies select cleaner sources and input material during their operations and production processes. By measuring the ability of the aforementioned three areas, the environmental performance of a company can thus be evaluated. In addition, Sroufe (2006) gave another 30 examples of environmental performance indicators, as shown in Table 6. Sroufe (2006) also indicated that managers should pay attention to corporate environmental reports, assessment of second tier suppliers, and documented processes for managing hazardous waste, pollution, environmental management systems (EMS), and reverse logistics.

Competitive Advantage of Firms It is important to enhance a firm’s competitive advantage because it means the company has better market opportunities compared to its competitors. The definition of the competitive advantage of a firm is that the company produces their product with the cost under the average production costs

for the industry or they earn higher profits than other competitors under the same production costs (Hill and Jones, 2001). If the company sustains competitive advantage for many years, it achieves “sustainable competitive advantage”. A competitive advantage is achieved by offering consumers greater value, better services and products, or owning a lower price/cost for its production compared to their competitors. Barney (1991) indicated that if a firm has a competitive advantage, the firm can implement a strategy in the specific market when currently other competitors are not competing in the same market. Moreover, Porter (1991) identified that competitive advantage often comes from providing customers with better value than competitors. In addition, if a company can produce a product at a lower opportunity cost (better economic value) than competitors, then the company has a competitive advantage in the market (Peteraf and Barney, 2003). According to the authors, there are two different types of competitive advantage. One is differentiation-based competitive advantage which has a greater benefit at the same cost when producing products and services compared to competitors, another one is efficiency-based competitive advantage which has the same benefit but at lower cost in production compared to

Table 6. Examples of environmental performance indicators (Source: Sroufe, 2006) 1. Biodegradable / compostable (%) 2. Commitment to periodical environmental auditing 3. Contains no ozone depleting substances 4. Emissions and waste (per unit of product) 5. Energy efficiency label 6. Environmentally-responsible packaging 7. Global application of environmental standards. 8. Hazardous air emissions 9. Hazardous waste 10. Involvement in Superfund site. 11. ISO 14000 certification 12. Landfill – tons of waste per year 13. Longer shelf life than industry standard. 14. Number of hours of training on environment per employee. 15. Use of less hazardous alternative (% of weight/volume). 16. On Environmental Protection Agency (EPA) hazardous chemicals list.

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Â€Â€Â€Â€17. Ozone depleting chemicals. Â€Â€Â€Â€18. Participation in voluntary EPA programs. Â€Â€Â€Â€19. Pre/post consumer recyclable content(%) Â€Â€Â€Â€20. Public disclosure of environmental record. Â€Â€Â€Â€21. Received any EPA/(RCRA non-compliance fines). Â€Â€Â€Â€22. Resources and energy (per unit of product). Â€Â€Â€Â€23. Secondary market for waste generated. Â€Â€Â€Â€24. Second tier supplier environmental evaluation. Â€Â€Â€Â€25. Solid waste. Â€Â€Â€Â€26. Take-back or reverse logistics program. Â€Â€Â€Â€27. Third party certification (eco labelling) Â€Â€Â€Â€28. Total energy used. Â€Â€Â€Â€29. Toxic pollution Â€Â€Â€Â€30. Volatile Organic Compound (VOC) content (%).


competitors. Peteraf and Barney (2003) suggested that economic value is generated from using either one or both of these advantages. Furthermore, competitiveness is sometimes referred to as whether or not a firm can competently manipulate their asset and skills to make a higher profit at the same cost, or make a higher profit at a lower cost compared to competitors (Chadwick and Dadu, 2009). Table 7 summarises these and further definitions of competitive advantage. In addition, if organisations want to have unique or individual competitive advantage in an ever changing market, they have to acquire a higher market share and profit margin through continuous innovation, improvement and product and/or service differentiation from competitors. Fleisher and Bensoussan (2003) state that: “the source of competitive advantage within a firm is often multifactorial in that it usually can not be attributed to only one type of resource”. They advocate that a company’s competitive advantage usually interacts with different types of resource.

In general, the competitive advantage of a firm can be measured by factors such as customer satisfaction, employee empowerment, quality cost system, lean manufacturing, continuous improvement and productivity enhancement (Gevirtz 1994). More examples of competitive advantage factors are given in Table 8.

THE PROPOSED MODEL AND FUTURE RESEARCH DIRECTIONS From previous research, it can be concluded that GSCM activities can help organisations to improve environmental performance and then enhance competitive advantage. In addition, GSCM helps organisations to reduce their negative impact on the environment, and it also helps them to improve environmental performance by implementing external and internal environmental management practices and systems. In terms of external environmental management, it can

Table 7. Definition of competitive advantage Author

Years

Definition of Competitive Advantage

Ansoff

1965

The competitive advantage of a firm is that the company’s product has better quality and service than their competitors in the market.

Hatten et al.

1978

The competitive advantage is entering a better market than competitors

Porter

1980

The companies have unique and competitive position in the market for long-term period. It always has a higher market share and profit margin than competitors.

Aaker

1984

The competitive advantage is that companies have specific skills or technologies, and higher profit assets than their competitors.

Porter

1985

Long-term competitive advantage is that companies are using strategic planning.

Murdick et al.

1990

The companies who own competitive advantage have better corporate strategy than competitors.

Ansoff & McDonnel

1990

The competitive advantage is defined as enterprises that have better product and service quality than competitors.

Porter

1991

The competitive advantage often comes from providing their customers with better value and service than competitors.

Barney

1991

A firm has competitive advantage if implementing a strategy currently when other companies are not entering the same market.

Hill & Jones

2001

Competitive advantage of a firm is that the company produces their product with the cost under average production cost of the industry or they earn higher profit than other competitors under the same production cost

Peteraf & Barney

2003

The company can create more economic value (lower opportunity cost) than their competitors, and then the company has competitive advantage in the market.

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Table 8. Examples of competitive advantage factors Author

Years

Examples

Porter

1985

Low cost and differentiation of product or service.

Swamidass

1986

Flexibility of production schedule, different price range with good product quality and introduce new products regularly.

Aaker

1989

Outstanding technology, good quality reputation, customer orientation, high customer satisfaction and low cost in production.

Giffi et al.

1990

Quality, cost, efficiency, shipment date, customer response, flexibility, innovation and customer service.

Miller & Roth

1994

Low price, design flexibility, quality consistence, quick production, reliability and customer service after sale.

Hill and Jones

2001

Efficiency, good quality, quick customer response and innovation

be classified as greening the suppliers, by helping them to establish their own environmental management systems, requiring them to obtain third-party environmental certification, and holding environmental seminars for suppliers in order to discuss current environmental issues and share knowledge together with other suppliers. Moreover, external environmental management through greening the process, green product innovation, green managerial innovation and developing new green technology such as pollution preventing technologies and pollution controlling technologies can also help to reduce hazardous emissions and waste which might cause negative impact on the natural environment. Based on the above literature, it is straightforward to come up with the following proposition: capabilities of greening of suppliers has a positive influence on green innovation (Rao,2002; Tukker et al, 2001; Poter and Van Der Linde, 1995; Shrivastava, 1995); green innovation has a positive contribution to environmental performance (Cairncross, 1992; Hart, 1995; Schmidheiny, 1992; Shrivastava, 1995; Poter and Van Der Linde, 1995; Vermulen, 2002; Tukker et al, 2001); green innovation has positive contribution to competitive advantage (Porter and Van Der Linde, 1995; Klassen and Whybank, 1999; Rao, 2002; Rao, 2005); and capabilities of greening of suppliers have a positive contribution to environmental

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performance (Rao, 2002; Rao, 2005; Tukker et al, 2001) and competitiveness (Rao, 2002; Rao, 2005). A model for studying the relationship between these factors is proposed diagrammatically in Figure 1. More specifically, the following hypotheses associated with the model (Figure 1) are worth further empirical research: H1: Greening of suppliers is positively associated with green innovation H2: Green innovation is positively associated with environmental performance H3: Green innovation is positively associated with competitive advantage H4: Environmental performance is positively associated with competitive advantage H5: Greening of suppliers is positively associated with environmental performance H6: Greening of suppliers is positively associated with competitive advantage H7: Green product innovation, green process innovation, green managerial innovation are positively associated with each other

CONCLUSION In this article, a review of the literature and the performance indicators of the four key aspects


Figure 1. Conceptual framework

in GSCM, namely, greening the suppliers, green innovation (further divided into green product innovation, green process innovation, green managerial innovation), environmental performance, and competitive advantage of the firm was presented. Based on that, a conceptual model was proposed. The authors hope that the model and the associated review on performance indicators are useful for future research in collecting empirical data to support the model so that the relationship among different variables can be confirmed.

Bowen, F. E., Cousins, P. D., Lamming, R. C., & Faruk, A. C. (2001). The role of supply management capabilities in green supply. Production and Operations Management, 10(2), 174–189. doi:10.1111/j.1937-5956.2001.tb00077.x

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KEY TERMS AND DEFINITIONS Supply Chain Management: Coordination of the activities from suppliers (upstream members) to customers (downstream members). Green Innovation: Including green product and process innovation - refers to the ability to incorporate environmental considerations in product and process development.

Greening of Suppliers: Activities to educate a company’s suppliers, and also selection of suppliers to be in line with environmental strategies. Competitive Advantage: The core competence of a firm in order to outperform its competitors. Environmental Performance: Measurable indicators of a company’s performance from an environmental perspective.

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Chapter 23

An Environmentally Integrated Manufacturing Analysis Combined with Waste Management in a Car Battery Manufacturing Plant Suat Kasap Hacettepe University, Turkey Sibel Uludag Demirer Villanova University, USA Sedef Ergün Drogsan Pharmaceuticals, Turkey

ABSTRACT This chapter presents an environmentally integrated manufacturing system analysis for companies looking for the benefits of environmental management in achieving high productivity levels. When the relationship between environmental costs and manufacturing decisions is examined, it can be seen that the productivity of the company can be increased by using an environmentally integrated manufacturing system analysis methodology. Therefore, such a methodology is presented and the roadmap for generating environmentally friendly and economically favorable alternative waste management solutions is elaborated. The methodology combines data collection, operational analysis of the manufacturing processes, identification of wastes, and evaluation of waste reduction alternatives. The presented methodology is examined in a car battery manufacturing plant, which generates hazardous wastes composed of lead. It is aimed to decrease the wastes derived from the production so that the efficiency in raw materials usage is increased and the need for recycling the hazardous wastes is decreased. DOI: 10.4018/978-1-60960-531-5.ch023


An Environmentally Integrated Manufacturing Analysis Combined with Waste Management

INTRODUCTION Manufacturing companies are now aware that whether to implement sustainable environment and resource management practices or not is no longer a choice for them. Companies operate in a world of dynamic competition in which technology, production and manufacturing processes, customer needs and, environmental regulations are constantly changing. Therefore, companies should constantly find innovative solutions to survive under the pressure of competitors and regulators. The increasingly strict environmental regulations combined with the improving consciousness of consumers for environmentally friendly products have put manufacturers in a precarious situation. Consequently, not only researchers, but also manufacturing managers are recognizing the importance of environmental management systems used for managing environmental practices (Angell and Klassen, 1999; Claver et al., 2007; Gupta and Sharma, 1996; Klassen, 2000; Porter and van der Linde, 1995; Sroufe, 2003; Xigang and Zhaoling, 2000). A major barrier to the adoption of environmental management systems is that companies often do not know the environmental costs of operating their business and therefore do not know the financial benefits that can be obtained by reducing their environmental impacts. Previously, environmental costs were generally defined as costs dealing with environmental laws, regulations, and taxes. It is now recognized that the true environmental costs includes: costs of resources, waste treatment and disposal costs, the cost of poor environmental reputation, and the cost of paying an environmental risk premium. The calculation and evaluation of environmental costs provide better understanding of the production cost of a product, and that it properly allocates costs to product, process, system or facility. Measuring environmental costs also improves the correctness of the pricing and gives profitability and competitive advantage, therefore increases the

overall management system of a company. For this reason, environmentally integrated manufacturing decisions require for the consideration of technical, economic, and ecological aspects of the manufacturing processes simultaneously. Especially the companies using hazardous materials in their production have started to consider environmentally integrated manufacturing systems to decrease their impacts on environment and to prevent pollution at source directly. This chapter presents a methodology for the environmentally integrated manufacturing system analysis for companies aiming to achieve the benefits of environmental management in obtaining high productivity levels. The aim of the methodology is the reduction of wastes derived from the manufacturing processes. The wastes produced during the manufacturing process are important cost issues for manufacturers. Waste of raw material creates important costs and environmental effects, especially when it is hazardous. For the case of using hazardous raw materials, the wastes derived from the manufacturing processes can not be sent to trash, instead they are sent to the recycling or treatment facility. Obviously, wastes that can not be used within the facility create inefficiency in the usage of raw materials. Therefore, the problem considered is to decrease the formation of wastes in order to decrease waste management costs and improve raw material usage. One solution to this problem is to use an environmentally integrated manufacturing system point of view aiming to decrease product losses, while reducing costs and improving profitability. The presented methodology is examined in a car battery manufacturing plant since any improvement to reduce wastes in this company will be yielding immediate environmental benefits since the waste usually consists of lead, which is hazardous. This application forms also an example about the achievability of “cleaner” production philosophies in the manufacturing sector using hazardous raw materials. The presented methodology is designed in a way that its implementation

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in different sectors is also possible. The presented methodology is the combination of data collection, manufacturing system analysis, identification of wastes, and evaluation of alternative waste management solutions. The objectives of the presented methodology are •

•

•

•

to create a point of view about the types of alternative waste management solutions that can be determined and to show their benefits, to discuss how the operations management functions of the facility will be affected by the implementation of an alternative waste management solution, to discuss what types of limitations can be encountered in a facility while implementing an alternative waste management solution, to give an example about the practicability of pollution prevention philosophies to the manufacturing sector.

The presented methodology intends the integration of environmental management principles with the operations management. In the next section, the need for adopting a sustainable development perspective is made clear by analyzing the relationship between environmental costs in manufacturing decisions. In addition, environmental operations management principles and criteria affecting the environmental operations management strategy are described. Next to this section, the methodology for the environmentally integrated manufacturing system analysis is presented. After description of the methodology, the manufacturing system of a car battery manufacturing plant is analyzed by using the given methodology. Finally, the conclusion and summary of the chapter is given.

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BACKGROUND In the last few decades environmental problems have received increasing attention. Protection of the environment has become an issue at all levels of society. Within the field of operations management, attention for environmental issues is now growing rapidly. Operations management is the process of managing people, resources and production systems in order to convert inputs into outputs. The inputs of the system are energy, materials, labor, and capital. The outputs of the system are the products demanded by customers (Nahmias, 2004). Wastes can be produced when converting raw materials into products and are considered as non-value-added outputs that create extra costs to the production of the product. The reduction or elimination of wastes in the production has always been a goal in operations management e.g., lean manufacturing. In order to provide the best use of raw materials, operations managers have to minimize the amount of the waste produced, namely, to reduce the cost and impact of the waste. An efficient approach undertaking this target is to integrate waste management into the operations management decision. Operations management deals with the optimization of the manufacturing process and covers decisions involving production planning, scheduling, capacity planning, inventory management, material management, workforce management, and quality management. It can be remembered that the traditional objective of inventory control, scheduling and production planning is to minimize production costs and improving measures such as worker idle time, work-in-process inventory levels, and production lead times while recognizing constraints such as limited space. Undoubtedly, by the integration of waste management into the operations management, the objective function should include not only the cited objectives but also environmental ones. It is obvious that an operations management team is not only responsible of the achievement of the desired products in terms of quality and


quantity, but also has to control working practices, resources consumption, emissions, and the flow of hazardous materials. Thus, operations managers are directly concerned with environmental issues in their operational responsibilities and play a critical role in developing management systems that affect environmental performance (Angell and Klassen, 1999; Gupta and Sharma, 1996). Environmental Operations Management (EOM) is a concept of integrating environmental management principles into the operations management process for the conversion of resources into usable products. Due to EOM principles, instead of looking at environmental management as a “cost”, companies can use EOM as an opportunity to improve their position by eliminating waste, removing non-value added materials and equipment, and reducing both short-term cost and long-term liability. The company will be able to plan and design products that do not create toxic wastes or require environmentally hazardous processes – from the introduction of the product to its final disposition. A long-term competitive advantage can be obtained by setting EOM principles to the production process. In order to create an environmental operations strategy, the operations management team is constrained by criteria such as: dependability, efficiency, flexibility and quality. The quality of the environmental attributes of the products is important criteria for consumers willing to buy. The dependability of a company is affected by the use of hazardous materials and processes. Accidents involving the shipment, transfer, and use of hazardous materials often result in temporary shutdowns of manufacturing plants. In addition, the capital investment needed to process and dispose hazardous materials is often high and affects the dependability. The flexibility of the company is limited by the materials and processes necessary for the production and by the types and quantities of hazardous materials discharged into the environment. Efficiency can be achieved by finding less expensive and less environmentally

hazardous materials and processes to manufacture the desired products (Gupta and Sharma, 1996). As mentioned before, one major barrier to the adoption of environmental management systems is that companies often do not know the environmental costs of operating their business and therefore do not know the financial benefits that can be obtained by reducing their environmental impacts. Until only a few decades ago, there was a belief that any investment in improved environmental performance would contribute to increased costs, which will finally reduce profits. Previously, environmental costs were generally defined as costs dealing with environmental laws, regulations, and taxes. Firms have tended not to measure environmental costs because management accounting systems have focused on clearly identifiable costs but not on the costs and benefits of alternative actions. In 1991, Porter put forward a new standpoint to the interaction between profitability and pollution prevention (Porter, 1991). This interaction has increased the theoretical and practical interest in the possibility that profitability and pollution reduction were not conflicting goals. According to Porter, pollution was simply a diminishing value in the production and was an indication of problems in products and/or processes. Therefore, contrary to previous opinions, reducing or eliminating pollution would not weaken but strengthen corporate competitiveness. After Porter’s study, a radical change has come in management’s views on pollution reduction and better environmental management. Companies became aware of the important role that environmental costs play in the calculation of total costs of production. It is now recognized that the true environmental costs includes: costs of resources, waste treatment and disposal costs, the cost of poor environmental reputation, and the cost of paying an environmental risk premium. With this point of view, environmental costs are transferred from overall (or indirect) costs to direct costs. As a result, the calculation and evaluation of environmental costs provide

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better understanding of the production cost of a product, and that it properly allocates costs to product, process, system or facility. Measuring environmental costs also improves the correctness of the pricing and gives profitability and competitive advantage, therefore increases the overall management system of a company. Thus, environmentally integrated manufacturing decisions require for the consideration of technical, economic and ecological aspects simultaneously (Melnyk et al., 2003; Spengler et al., 1998; Wu and Chang, 2004). Additionally, companies try to avoid inefficiencies in the production and waste removal charges as a result to decrease the cost of unit production. Especially the companies using hazardous materials in their production have started to consider environmentally integrated manufacturing systems to decrease their impacts on environment and to prevent pollution at source directly. Manufacturing decisions should not be made in isolation from decisions in environmental management. In recent years, many production planners and decision makers have started to recognize the role and significance of the integration of economic and environmental efforts in a single productionplanning program. New concepts connecting manufacturing practices, pollution control and prevention and operations are recently being used in order to increase the efficiency of converting raw materials into products. Specifically, studies are carried out in order to create decision support tools for analyzing the effects of planning decisions on the amount of product losses. Companies are willing to organize their production systems to enhance resource productivity by adopting an environmental approach. Based on this kind of approach, a company can include environmental principles in the mission statement, incorporate the cleaner production philosophy into product and process design and, consequently, develop an environmental business strategy in order to gain competitive advantage. At this point, it is important to understand the difference between

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pollution prevention and pollution control. Pollution control covers the elimination of pollution after the waste is generated. On the other hand, pollution prevention covers the modification/redesign of the production process and the introduction of new technologies throughout the product life-cycle to identify the source of the problem. A company adopting traditional pollution control methods focuses on its activity on the short term. In this context, the company sets as its main aim to carry out environmental impact correcting actions that do not entail the development of new skills needed to manage new environmental processes. Therefore, it is seen that traditional pollution control methods are practically inefficient compared to prevention methods. Therefore it is clear that preventing environmental damage is cheaper and more effective than attempting to manage or fix it. Pollution prevention has replaced the traditional pollution control methods and has become an important research topic for the process design (Claver et al., 2007; Xigang and Zhaoling, 2000). There are many studies demonstrating that pollution prevention is almost the most cost-effective constituent of integrated waste management strategies in different manufacturing systems (Akkerman and van Donk, 2006; Dahab et al., 1994). One step forward of pollution prevention is the concept of cleaner production (CP). CP can be described as the continuous application of an integrated preventative environmental strategy to processes, products and services to increase efficiency and reduce risks to humans and the environment. For production processes, CP includes conserving raw materials and energy, eliminating toxic raw materials, and reducing the quantity and toxicity of all emissions and wastes before they leave a process. For products, the CP strategy focuses on reducing impacts along the entire life cycle of the product, from raw materials extraction to ultimate disposal of the product. In CP applications, savings are often achieved with little or no capital expenditure by simply changing management practices. Many successful case


studies show that CP can provide opportunities for making sound choices for both environmental concerns and economic benefits (Dahodwalla and Heart, 2000; Jia et al., 2005). One of the most basic reputations of CP is that it improves efficiency and productivity in industry. These improvements result in lower expenditure on resources such as energy and water, increased efficiency in production, fewer risks associated with environmental impacts, and decreased waste generation that leads to savings in landfill fees and pollution licenses. Due to the CP context, continuous improvement is required not only in technology and know-how, but also in managerial skills and policies. CP offers much for operations management researchers to draw on as they explore the linkages between process and product technology, environmental management and performance. The car battery manufacturing industry is one of the critical industries in the implementation of pollution prevention and CP studies because of the lead (Pb) used in production. Wastes should be decreased in order to prevent the hazardous effects of Pb to the environment and human health. Many studies involving technology changes and pollution prevention options are accomplished for the battery manufacturing industry (Boden and Loosemore, 2007; Dahodwalla and Heart, 2000; Ferreira et. al. 2003).

of techniques aiming the reduction of wastes in the manufacturing area. Waste auditing methodologies are examined in this context. Operations management techniques involving the reduction of material losses are then analyzed. The problem solving techniques are used for the identification of manufacturing problems, the investigation of possible solutions and the selection of the best solution. The methodology is established by integrating operations management perspectives to the classical waste auditing methodology. Waste auditing generally covers three steps. The first step, which is the pre-assessment, covers the division of the processes into unit operations and the construction of the process flow diagram. The second step, which is the material balance, covers the identification of inputs, outputs and the current reuse and recycling methods. The final step which is the synthesis, deals with the evaluation of waste reduction options and the creation of the waste reduction action plan. The presented methodology, different from the classical waste auditing, cautiously focuses on the operations of the manufacturing facility. Processes are analyzed based on the inputs used, working practices, capacities of machines, and byproducts and outputs derived from the processes. Steps of the presented methodology can be summarized as follows: •

THE ENVIRONMENTALLY INTEGRATED MANUFACTURING SYSTEM ANALYSIS The environmentally integrated manufacturing system analysis provides a roadmap for companies willing to apply an integrated preventive waste management approach in their manufacturing plant. Many possible working areas and information to be collected are given so that this methodology can be applied in different manufacturing sectors and companies. The design of the methodology firstly involves the investigation

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Step 1: Analysis of the system ◦âŠ¦ Data collection ◦âŠ¦ Manufacturing system analysis ◦âŠ¦ Construction of a process flow diagram ◦âŠ¦ Current waste management practices ◦âŠ¦ Environmental impacts of materials used in production Step 2: Identification of Alternative Waste Management Solutions ◦âŠ¦ Investigation of Waste Management Technologies ◦âŠ¦ Investigation of Alternative Waste Management Solutions

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•

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Step 3: Evaluation of the Alternative Waste Management Solutions ◦âŠ¦ Operational Analysis of Alternative Waste Management Solutions ◦âŠ¦ Technical Analysis of Alternative Waste Management Solutions ◦âŠ¦ Economical Analysis of Alternative Waste Management Solutions Step 4: Comparison of Alternative Waste Management Solutions

Analysis of the System In the first step of the methodology, the analysis of the manufacturing system should be accomplished. This analysis will provide the information about the current manufacturing and waste management system. The data collection phase involves a thorough assessment of the company, from the purchase of various inputs (e.g., raw materials, energy and water) to the output itself (products). This phase implicates the collection of data such as: product types, raw materials used and their prices, the demand of products and their prices, material requirement planning, and supply chain partners. By analyzing the data collected, it will be possible to find the processes operating with low efficiencies. The manufacturing process is considered as one of the important sources of environmental impacts of the industrial production. Therefore, it is essential to analyze in detail all the elements of the manufacturing system in order to prevent the pollution at the source. The information about the system as a whole is gathered in this phase by combining the data collected about processes and their operational conditions, material management, capacity planning, production planning and scheduling, quality management, workforce management, supply chain management, and logistics. The operations forming wastes are determined in this phase of the system analysis. It is important to obtain real data in this step, because even if it is not optimal, the current manufacturing system of the company

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will be a basis for a comparison. With the aid of data collected in the first and second phases, it is now possible to generate a process flow diagram for a complete manufacturing process including sequence of operations, raw materials, semifinished products, products and wastes. In the next phase, the investigation of current waste management practices in the company is accomplished. The waste management system of a company involves the entire procedure of collecting, transporting, processing, recycling or disposal of waste materials. Waste management can involve different methods and fields of expertise for solid, liquid, gaseous or radioactive substances, with the aim of reducing the effects of these wastes on the health and environment. During this phase, data such as the quantity and rate of generation of production wastes are collected. The content of wastes and the waste management costs are also investigated. Current waste management practices in the company should be determined correctly and then analyzed with respect to their appropriateness. A waste management application may be efficient in treating a waste completely, but it may be very costly or may cause extra usage of raw materials. On the other hand, a simple and inexpensive application may be financially welcomed but may gradually create serious damages in worker’s health or environment. As a result, measurements should be made to find out the real needs of the system in order to solve each problem efficiently. For the last phase of the first step, investigating the environmental impacts of raw materials, production processes and products is important. Investigations may give ideas about the substitution of hazardous raw materials with non-hazardous materials. These kinds of substitutions may give benefits such as the decrease in employee exposure to pollution and decrease in costs due to the hazardousness of the material, such as special transportation costs, fees, etc. Making detailed analysis about the environmental impacts of materials is also an important action for convincing people to implement the alterna-


tive waste management solutions suggested. The workers and the management of the company can be influenced to take environmental precautions by informing them about impacts of products produced or materials used. After clarifying the environmental impacts of raw materials, production processes and products, it will be effective to suggest alternative waste management solutions as a new way of achieving better working conditions in the facility.

Identification of Alternative Waste Management Solutions In the second step of the methodology, the investigation of possible alternatives aiming to reduce or reuse waste should be performed. Once the production wastes and inefficient processes in manufacturing system are identified, the next move is to investigate the available waste management technologies or practices in the literature. Current operational conditions of the company must be compared with the conditions reported in the relevant literature. The investigations may draw upon basic research results, literature searches, field research, and discussions with industry experts and technology-users. This process will make it possible to recognize environmentally friendly methods, the best available technologies, and the newest technologies. Alternative waste management solutions are prepared by using information about wastes and processes operating with low efficiencies. Alternative waste management solutions involving the integration of economic and environmental efforts are investigated. According to this integrated point of view, waste is accepted as a resource that can be used in the production process. The investigation of alternative waste management solutions will pursue the following hierarchy: 1. Reduction at source 2. Internal (on-site) and external (off-site) recycling

3. Treatment of waste streams 4. Controlled disposal when there is no other solution. The reduction of wastes at source may be accomplished by the purchase of new equipments or materials, or may simply involve small changes in the production process. Pollution prevention alternatives aiming the reduction of waste at the source are at the first priority. The environmental and economic benefits of reducing waste at source are much higher than other alternatives because the raw material usage and the waste management costs can both be reduced. If the formation of waste can not be prevented at source, internal and external recycling alternatives must be considered in order to minimize the waste treated/ disposed. With the recycling opportunities, wastes from one industrial process can serve as a raw material for another, therefore the impact of the industry on the environment is reduced. Specifically, on-site recycling is very valuable because it eliminates the cost of sending the waste to an off-site facility, therefore increases the productivity of the company. In cases where the waste can not be prevented or can not be reused within the facility, off-site recycling is a choice allowing to send out the waste from the facility and to allow its reuse by other industrial processes. Therefore, the impact of the waste to the environment is diminished. However, off-site recycling creates a cost due to the transportation of wastes to the recycling facility, and more importantly, due to the inefficient use of raw material that can not be converted into a product. The treatment of waste streams is accomplished to remove the hazardous portion of a waste from the non-hazardous portion, such as water. Various techniques are available to reduce the volume of a waste through physical treatment. For example, concentration techniques including vacuum filtration, filter press or heat drying are commonly used to dewater the sludge. These techniques are used to reduce the volume, and thus the cost of dispos-

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ing a waste material. Moreover, once the material is concentrated, there is a greater likelihood that the materials in the waste can be recovered. This allows the potential use of the waste streams as a raw material for other companies or for the company itself (Freeman, 1988, p. 5.13). Controlled disposal is a solution for wastes which can not be treated by pollution control technologies. Disposal is the last preferred waste management option. Nevertheless controlled disposal is an important part of environmental management; even though it is the least effective one.

Evaluation of Alternative Waste Management Solutions Each investigated alternative waste management solution in the previous steps of the methodology must be analyzed in order to evaluate how beneficial or practical the implementation of this alternative will be. It is important to use an interdisciplinary point of view while evaluating each alternative waste management solution since the entire production system is aimed to be optimized. By this integrated point of view, it will be possible detect the positive and negative results of each alternative waste management solution proposed. The scope and complexity of an apparently feasible alternative waste management solution can change after the analysis of the initial problems or after the design of the system. An alternative waste management solution is feasible if it works with available or obtainable resources, produces better results in both environmental and economical point of view and if it does not conflict with other management functions. For example, while an alternative waste management solution may be feasible due to machine schedules, it may be infeasible due to the demand pattern of the products. As a result, it may not be possible to implement this alternative. It is also important for an alternative waste management solution to have a reasonable reimbursement time. Evaluations of

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solutions alternatives are made under the title of the following measures. Operational Analysis of Alternative Waste Management Solutions: Each alternative waste management solution should be analyzed in order to see if it is operationally feasible. The operational viability generally consists of measures such as the applicability of an alternative. In order to see if an alternative waste management solution is desirable in an operational sense, it should be proved that the alternative is practical and efficient. In other words, it should be demonstrated that the alternative makes maximum use of available resources including raw materials, people, and time. Before evaluating an alternative waste management solution, it should be verified if the current work practices and procedures support a new system. This verification also covers the adaptation of end users and managers to the change. The flexibility and expandability of the alternative must also be taken into account because capacity changes can take place in the company as a result of future needs and projected growth. Technical Analysis of Alternative Waste Management Solutions: Each alternative waste management solution should be analyzed in order to see if it is technically feasible. The technical viability generally consists of measures such as the practicality of an alternative and the availability of technical resources and expertise within the facility. An important aspect identifying if the alternative waste management solution is technically feasible is the availability of the required technology. Some alternatives may involve solutions that can be applied without the need of a new technology or equipment. Conversely, there may be alternative waste management solutions that need the investigation of the market availability of the required technology or equipment. If the required technology is produced or sold within the country, it is needed to compare the different sellers and selling prices. On the other hand, if the required technology is exported, it is needed to investigate the different countries, selling prices


and transshipment rates. In order to see if an alternative waste management solution is desirable in a technical sense, the company should verify if the technical requirements, impediments and competing technologies are identified. By evaluating current technology options and limitations, the company can define how difficult it will be to build the new system. For some alternative waste management solutions, there may be critical elements that require feasibility demonstration. Therefore the company may require making tests and experiments in order to see if the considered alternative waste management solution is technically feasible. By this way, the performance of experiments and tests can be compared with preliminary technical requirements and objectives. The experiments and tests will enable the presentation of a path forward for the next stage of the alternative. Moreover, written results, models, or laboratory process outputs demonstrating technical concepts and benefits will improve confidence that the alternative waste management solution will successfully meet the goals of the company. Economical Analysis of Alternative Waste Management Solutions: If an alternative waste management solution is operationally and technically feasible, then the economical analysis of the alternative should be carried out to examine if it is affordable or not. The economical viability generally consists of measures such as the quantitative estimation of benefits of an alternative waste management solution, which are typically reduction in costs or risks. An alternative waste management solution that is economically desirable is regarded as justified because the economic aspects are generally the bottom line of many projects. In the economical analysis phase, the costs, benefits and incomes of the current system should also be identified. By this way, it will be possible to compare the economic aspects of the current system and the suggested alternative waste management solution. This will allow realizing the cost of not developing the new system. In order to see if an alternative waste management

solution is desirable from an economical point of view, the cost-benefit analysis should be made and the cost-effectiveness of the alternative should be proved. By this analysis, it will be demonstrated if the benefits outweigh the estimated costs of development, installation, operation and maintenance. When making an economical analysis, it is important to predict tangible and intangible benefits. Furthermore, the timing of costs and benefits is an important factor determining the payback period, which is also an important decision criterion affecting the applicability of an alternative waste management solution.

Comparison of Alternative Waste Management Solutions As it is known from operations research, optimizing a variable may not always give the overall optimal solution, especially when several aspects such as productivity and environmental performance are both aimed (Nahmias, 2004, p. 671). Therefore, the consequences of the alternative waste management solutions and their effects on the overall performance should be discussed. If an alternative waste management solution is found to be feasible, the company may decide to proceed with this solution after comparing it with other alternatives generated for the considered problem. In selecting the best alternative, a company often considers trade-offs. The final decision can be determined by working with end-users, reviewing operational, technical and economic data. On the other hand, decisions criteria such as dependability, efficiency, flexibility and quality may be used for creating an environmental operations strategy. Therefore, if a company aims to accomplish an environmentally integrated manufacturing system analysis, a multi-disciplinary team should be formed and operational, technical and economic aspects should be compared for each alternative waste management solution by taking account the criteria mentioned above. It is also essential that the company reviews and changes its environmentally

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integrated manufacturing plans dynamically to assure high environmental standards. An important issue in improving the manufacturing system is the use of feedback information in order to continually adjust the mix of inputs and technology needed to achieve desired outputs. Information derived from environmentally integrated manufacturing system analysis will continually change production planning decisions such as demand forecasting, purchasing, production and personnel scheduling, quality control, and inventory control issues. The team leader should constantly monitor the manufacturing system and its environment in order to plan, control and improve the system.

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•

IMPLEMENTATION OF THE ENVIRONMENTALLY INTEGRATED MANUFACTURING SYSTEM ANALYSIS IN A CAR BATTERY MANUFACTURING PLANT The implementation of the methodology is accomplished in a car battery manufacturing plant working with hazardous materials such as lead and sulfuric acid. The lead-acid battery manufacturing company occupies a total space of 22,500 m2 in its manufacturing plant in Ankara. The company produces different types of lead-acid batteries and also supplies different types of semi-finished products like grids, raw plates, charged plates as well as lead monoxide. The production capacity is 1,500,000 batteries per year and there are 50 white-collar and 250 blue-collar workers. The following assumptions are considered in the context of the study: • • •

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The manufacturing process of wet-charged batteries is considered. Prices of products are assumed to be constant for every customer. Data collected about the manufacturing system is considered as input data.

•

•

•

•

The unit waste management cost of an onsite recycled waste consists of its raw material cost. Labor and overhead costs associated to the considered waste are included if a change in these costs is obtained according to the evaluation of alternative waste management solutions. The unit waste management cost of an offsite recycled waste consists of its raw material cost and transportation cost, apart from the selling price to the recycling facility. The unit waste management cost of discarded wastes consists of the raw material cost. The unit waste management cost of wastewater consists of the raw material cost. Energy usage in the wastewater treatment facility is ignored. Chemical usage costs are included to costs calculations if a change in chemical usage is obtained according to the considered alternative waste management solution. In the net present value calculations, the costs are assumed to derive at the end of each month and the monthly interest rate is assumed to be 1.6%. The company works 6 days a week. Each day consists of 3 shifts, which are 8 hours each. The company does not hold end-product inventory and there is no cost associated to inventory carrying. There is no problem associated to the limited storage area.

With the use of the methodology, the manufacturing system of the company is analyzed and the alternative waste management solutions are investigated and evaluated.

Analysis of the System The analysis of the system provides information about the current manufacturing and waste


management system. The data collection phase involves a thorough assessment of the company, from the purchase of various inputs to the output. Data such as the types of batteries, demands and prices of each product, raw material prices and material requirement plans are obtained in this phase of the study. The demand forecasting procedure and bill of material of a car battery are obtained. The current production planning and scheduling system are analyzed. Each manufacturing process is analyzed in detail to determine the operations forming wastes. The manufacturing process of

a car battery and wastes derived from each unit process are shown in Figure 1. The waste management system of the company involves the entire procedure of collecting, transporting, processing, recycling and disposal of waste materials. Information about the production wastes (quantity and rate of generation) is collected. The composition of wastes and waste management costs are investigated. Current waste management practices in the company are determined and analyzed with respect to their appropriateness in terms of environmental and economical benefits. Making detailed analysis

Figure 1. Process Flow Diagram of a Car Battery

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about the environmental impacts of the wastes is also important for convincing people to implement the suggested alternative waste management solutions, which can be considered as a new way of achieving better working conditions in the facility. This study focuses on the wastes produced in three manufacturing processes as shown in Figure 1: grid casting, battery closing, wet-charging. Due to the current waste management system of the company, the identified wastes are considered as: • •

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On-site recycled wastes: Wastes used within the facility. Off-site recycled wastes: Wastes sent to recycling facilities to recover the raw material. Wastewater: Contaminated water treated in the wastewater treatment facility of the company

Identification of Alternative Waste Management Solutions The alternative waste management solutions are identified by investigating waste management technologies and alternative waste management solutions. The possible waste management technologies in the battery manufacturing plant are identified and the benefits of implementing pollution prevention techniques in the considered sector are investigated. The best available technologies aiming the decrease of particular types of wastes are described in detail in the evaluation of alternative waste management solutions investigated for the considered wastes. Additionally, two case studies concerning a general pollution prevention study in the car battery manufacturing industry are examined. The applicability of each alternative waste management solution is evaluated in order to show the type of problems that could derive from their applications. By making an operational, technical and economical analysis for each of the alternatives, it is possible to present realistic propositions. Therefore, the possible

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benefits and limitations are identified for each solution alternative.

Alternative Waste Management Solutions: Wastes from Grid Casting Dross obtained from the grid casting process is the waste that causes the highest lead loss in the company. In the grid casting process, the excess parts of each grid are cut automatically and transferred to the melting pot by a conveyor belt located behind grid casting machines. Additionally, the rejected grids detected by operators are added to the melting pot immediately after their detection. Therefore, the grid casting process involves continuous addition of wastes into the melting pot. The formation of dross is the result of molten lead alloy and air contact. It is simply the oxidation of lead alloy. Therefore, the formation of dross is inevitable on the surface of the molten lead alloy in the pot that is open to atmosphere. In fact, the dross formed may act as a protective passive film preventing further dross formation if it is not disturbed. But, when wastes deriving from the grid casting machine are added to the melting pot continuously, the surface covered by dross collapses, and this procedure causes an increase in contact area of lead alloy with air. As a result, the amount of dross increases continuously when wastes are added to the pot. There are two alternative practice identified for the reduction of dross amount in this study as explained and analyzed below. Addition of Excess Parts and Rejected Grids in Batch Mode: The practice of adding excess parts and rejected grids may be changed from continuous to batch. In other words, the parts and grids may be collected and then added at specific time intervals, so that the contact time of the molten lead alloy with air can be decreased. This practice is experimented in the grid casting procedure to observe any change of dross formation rate in this study.


Two experiments are accomplished for observing the relationship between dross formation and time interval adopted for the collection of rejected parts and grids. Two different time intervals were tested as 1.5 and 3.0 hour. The current grid casting procedure was also observed for comparison. Before the experiment, the dross layer from the surface of the molten lead alloy was completely removed from the melting pot by the use of a ladle with holes in it. The amount of dross formed in the melting pot during 1.5 and 3.0 hour periods was observed under the conditions in which the excess parts and rejected grids were collected. At the end of the collection period, the production of grids was stopped and the dross formed on the surface was removed and weighed. Following this, the collected excess parts and rejected grids were weighed and added to the melting pot. Since the excess parts and rejected grids weighed about 700 kg, the manual addition of the rejects to the pot took approximately 25 minutes. Then, the formation of dross for an hour was allowed under the conditions of no production. Finally, the dross formed in an hour was collected and weighed. The summation of the dross collected before and after the addition of rejects is considered as the total weight of dross obtained from the experiment with the considered time interval. The results from this experiment show that the ratio of rejects to the ratio of product produced is about 58-60%, which is considerably high. Following up these steps, the current grid casting procedure was observed for the same time

intervals; specifically 1.5 and 3 hours time periods. Accordingly, the production of grids was started with continuous feeding of the melting pot with the excess parts and rejected grids by conveyor belt. The amount of dross formed at the end of the time interval was measured by collecting and then weighing the dross. During this step, the amount of excess parts and rejected grids could not be measured since they are automatically added to the melting pot. According to the results obtained from the two experiments with different time intervals, it is proved that the suggested work practice reduces the amount of dross significantly. It has also been shown that decreasing contact time decreased the amount of dross formed. Therefore, the longest possible time period for collection is expected to decrease the dross amount most. The cash flow analysis of the batch mode and the current system are compared in Table 1. The calculations in Table 1 take into basis that dross is reduced by 48% with the use of the batch mode alternative. The cost of raw material loss is calculated based on the unit cost of dross, which is 1.18 $/kg. Since it took 3 hours to obtain 41 kg of dross in the experiment, the production of dross is assumed to be 13.6 kg/hour. Additionally, the unit labor cost for the company is calculated to be 1.63 $/hour, based on the base wage rate. Given the unit labor cost and unit production rate of dross, it can be concluded that the unit direct labor cost of dross is 0.11 $/kg. Based on the monthly quantity of

Table 1. Comparison of cash flow analysis of the current system and the batch mode for t=3.0 hours Current System

Batch Mode

Quantity of dross (kg/month)

12,299

6,396

Cost of raw material loss ($/month)

14,605

7,593

Direct labor cost associated to dross ($/month)

1,352

759

Overhead cost associated to dross ($/month)

2,712

1,410

Labor cost associated to the collection of parts ($/month) Net Present Value ($/year)

-

285

203,552

108,920

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dross, the direct labor cost associated to dross in the current system is: Direct Labor Cost of Current System= 0.11 $/ kg x 12,299 kg/month = 1352 $/month. In the production cost of a battery, it is known that the direct labor occupies a percentage of 14%, and the overhead occupies a percentage of 26% of the total cost. The overhead cost associated to dross can be calculated by using these ratios and the direct labor cost as calculated above. Knowing that the 14% of the total cost is 1,337 $/month, it can be calculated that the 26% of the total cost, which corresponds to the overhead cost associated to dross, is 2,712 $/month, as shown in Table 1. The direct labor and overhead costs of the batch mode are calculated similarly. In addition to the current system, in the batch mode there is a need of labor when collecting excess parts and rejected grids. In the experiment, it is seen that a total of 45 minutes is spent for a production of 3 hours. Taken into basis that the company works 24 hours during 29 days/month, it is calculated that the monthly labor spent for this alternative is 174 hours. Since the unit labor cost is 1.6 $/hour, the labor cost associated to the collection of parts is: C Labor Cost of Collecting Parts= 1.6 $/hour x 174 hours/month = 278 $/month. The net present values of the current system and the batch mode are calculated for one year, as seen in Table 1. The costs are assumed to derive at the end of each month and the monthly interest rate is taken as 1.6%. When comparing net present values, it can be seen that the batch mode decreases costs by 46% compared to the current system. This alternative obviously will reduce the quantity of lead alloy required to produce the same amount of grid since the raw material loss in dross will be minimized. Therefore, it will clearly improve the productivity by reducing raw material consumption. This alternative is also advantageous because the waste is reduced at source. As a result, the environmental impact of the company can be considerably reduced by using this alternative.

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Separation of Pure Lead from Dross Using Vitaflux™: The dross collected from the melting pot is high in its lead (Pb) content. It is observed that dross formed in the current system contains a quantity of 41% of lead in a purity of 99.92%. As mentioned before, the dross is currently collected and sent to the recycling facility. However, if the pure lead can be extracted from the dross inside the facility, it will be a very beneficiary practice since it will be possible to reuse the pure lead as a raw material. Drossing-off fluxes are used for this purpose in order to accumulate the oxides and allow easy removal from the surface of the molten lead (Brown, 1999, pp. 56-62). Specifically, there is a material called Vitaflux™, which is used to recover the lead from dross at source (NA Graphics, n.d.). Application of the material is very simple. Vitaflux™ is added on the surface of the melting pot before dross is collected. The lead alloy begins to burn with the addition of Vitaflux™ and the pot is mixed until dross becomes fine powder. At the end of the reaction, the dross in fine powder form is accumulated on the surface of the molten metal. Vitaflux™ has been tested in the company and lead was recovered from the dross successfully. The grid casting department consists of two melting pots. Due to the lead alloy load of the pots, six tubes of Vitaflux™ is needed for each melting pot every time dross is collected. Since dross is collected once a day in the grid casting department, one box containing a dozen of Vitaflux™ tubes is needed every day. In the calculations, it is assumed that one year consists of 350 working days. Therefore, about 350 boxes of Vitaflux™ are needed per year. Results from test showed that the use of Vitaflux™ does not influence the composition of the lead alloy in the melting pot. Besides, when the dross collected after the use of Vitaflux™ is analyzed in the laboratory of the company, it was observed that the pure lead is totally removed from the dross. Therefore, it can be concluded that the use of Vitaflux™ creates


significant amount of recovery of lead from the dross. Experiments conducted in the company for recovering lead from dross showed that the quantity of the dross decreases by 30% when pure lead is separated from dross with the help of Vitaflux™. In other words, this alternative involves 30% of reduction of dross at source. Therefore, even if the impact to the environment can not be quantified, the company’s damage to the environment is certainly decreased on a large scale since the dross deriving from grid casting is the highest amount of waste in the company. In addition and more importantly, a significant quantity of pure lead is going to be saved and will be used in production. As a result, this alternative allows a more efficient use of raw materials and a decrease in total recycling costs. The net present values of the current system and the Vitaflux alternative are calculated for one year in Table 2. In addition to the current system, in the Vitaflux alternative there is a need of extra labor time when mixing the pot and collecting the dross after the addition of Vitaflux. Dross is collected once in 24 hours from 2 melting pots. In the current system, the collection of dross from one pot takes 10 minutes. Taken into basis that the company works 24 hours during 29 days/month, it is calculated that the monthly labor spent for in the current case is 10 hours. Since the unit labor cost is 1.6 $/hour, the labor cost associated to this alternative is: C Labor Cost of Current System= 1.6 $/hour x 10 hours/month = 16 $/month.

The same calculation is made for the Vitaflux alternative taking into basis that the collection of dross from one pot takes 20 minutes. On the other hand, the period in which Vitaflux™ is bought and the quantity of Vitaflux™ needed in this time period is important. It is calculated that 3 month purchasing period gives the minimum net present value. The monthly interest rate is taken as 1.6%. When comparing net present values, it can be seen that the Vitaflux alternative decreases costs by 17% compared to the current system. Since the amount of dross is assumed to be equal to the lead alloy loss, it can be concluded that 3,690 kg/month of lead can be recovered and used in production with the Vitaflux™ application.

Alternative Waste Management Solutions: Setup Wastes Generated From Battery Closing Operation Minimization of setup time may correspond to reduction of setup wastes for the industries producing sequential products requiring similar production techniques. One way of decreasing setup waste may be to decrease the number of machine adjustments in the productions, where the number of setup waste is constant according to quality regulations. The production scheduling policy used in most of the industries is based on a system where monthly demands are divided into short sub-periods in order to increase the flexibility of the production. However this may cause production of abundant numbers of setup waste

Table 2. Comparison of cash flow analysis of the current system and the Vitaflux alternative Current System

Vitaflux Alternative

Quantity of dross (kg/month)

12,299

8,609

Cost of raw material loss ($/month)

14,605

10,224

16.25

32.5

-

19,465*

158,492

130,648

Labor cost associated to the collection of dross ($/month) NPV of Vitaflux for 3 months purchasing period Net Present Value ($/year) * Calculated due to data of NA Graphics (n.d., n.p.)

451


as a result of inverse proportionality between the length of the sub-period of scheduling plan and the number of machine adjustments. If longer scheduling sub-periods are chosen, then the production of setup wastes and the inventory holding costs will be decreased but the flexibility of the scheduling will be lost. On the other hand, if the scheduling sub-period is shortened, then the scheduling will be more flexible but the number of setup waste will increase. For this reason, there is a need to find out an optimum scheduling plan taking into account the production of setup wastes. When adjusting the production schedule with the aim of minimizing setup wastes, the primary concern of the car battery manufacturing company is the demand level of products. Products with low demands (products whose monthly demands are approximately equal to the production capacity of one shift) are produced in one or two shifts. Products with high demands (products whose monthly demand highly exceeds the production capacity of one shift) are produced on a weekly basis and are sent to customers each week. Namely, the monthly demand is divided to weekly demands. Since these highly demanded products are not produced continuously, a setup adjustment on the closing machine is needed each time the production of this product starts (each week). The number of setup adjustment will be high, as well as the setup waste generated. An alternative waste management solution is to schedule products so that high-demanded products are produced continuously like the low-demanded products. By this one-month-scheduling method, the monthly demand of high-demanded products will not be divided by four; the monthly demand will be produced in one batch. Namely, the production of these products will continue until the monthly demand is reached. It is necessary to produce one setup waste while making machine adjustments in the battery closing operation. This setup waste is considered as a refurbished battery and can not be sold to customers. Therefore, the production cost of the battery is

452

considered as the on-site waste management cost of the refurbished battery. One way to establish a pollution prevention approach may be to change the production scheduling policy to decrease the number of refurbished batteries. The relation between the length of the scheduling sub-period and setup waste amount is established to find out the existence of an option to obtain minimum waste. The scheduling sub-period (one week, two week, or four week) in a month affects the number of setup waste generated. Therefore, one of the ways of reducing the setup waste is to determine the sub-period with minimum inventory holding and waste removal cost between different scheduling sub-periods. For this reason, different scheduling sub-periods are analysed, such as one week, two week and four week. The company is currently using a production scheduling based on one-week sub-period. A binary integer programming model is developed to determine the sub-period giving the minimum total cost comprising inventory holding and waste management costs. Inventory carrying within the considered sub-period is ignored. The model is demonstrated below. m



∑ W R X i =1

1

i

1

Minimize

 3 +W2Ri X 2 +W4Ri X 4 + hi X 1Di + hi X 2Di   2

subject to X1 + X 2 + X 4 = 1 X k ∈ {0, 1}

, k = 1,2,4

Where, Di is the demand of product i, Wi,k is setup waste of product i derived with alternative k, Ri is the waste management cost of product i, and hi is weekly inventory holding cost of product I The model is solved for the given data. Different types of products with varying demands (5 of them are low-demanded and 12 of them are high-demanded)


can be seen that the four-week sub-period decreases costs by 95% compared to the current system. The wastage of the semi-finished products and the according waste management costs can be significantly decreased with the four-week sub-period. This alternative is an important example showing how the operational decisions can improve environmental problems in a company. However, the production of a high-demanded product in one batch may not be possible in certain cases because of the lead-time of the demands. The operation time of a product may have a long duration, especially when all of the monthly demand is to be produced in one batch. Therefore, the lead time of the other products waiting on the queue will be an important constraint. In addition, production plans must be flexible enough to meet the unexpected demands coming from the competitive environment. The scheduling of this type of environmentally integrated production plan may be difficult and sometimes infeasible for companies that have to deliver products every week.

are taken into basis and the forecasts of year 2006 are considered as the monthly demands of each product. The battery production cost associated to the refurbished batteries is considered as the waste management cost of the refurbished battery. The weekly inventory cost of a product is considered as the selling price of the product multiplied by the weekly interest rate which is taken as 0.4%. The number of setup wastes changes according to the sub-period chosen. The one-week sub-period produces 4 setup wastes, the two-week sub-period produces 2 setup wastes and the four-week subperiod produces 1 setup waste per month. The model is solved in Excel Solver for the demands of each month. The option giving the minimum cost is found as the four-week sub-period for each run (In the optimal solution, X4 is 1 while X1 and X2 are 0). The cash flow analysis of the optimal solution of the mathematical model and the current system are compared in Table 3. As shown in Table 3, the optimal solution of the mathematical model for each month corresponds to the cost associated to the sub-period giving the optimal solution, the four-week subperiod. When comparing net present values, it

Table 3. Comparison of cash flow analysis of the current system and the mathematical model Costs (YTL/month)

Current Case

Optimal Solution of the Mathematical Model

January

18.41

0.97

February

18.41

0.97

March

19.30

0.91

April

19.30

0.91

May

15.84

0.89

June

15.56

0.89

July

15.20

0.84

August

14.55

0.84

September

23.15

0.97

October

23.42

0.97

November

24.01

0.97

December

23.42

0.97

Net Present Value ($/year)

207,240

10

453


Modification of the Wastewater Treatment Facility to Reduce the Amounts of Chemicals Used and to Decrease Water Consumption in Production The cooling and washing water coming from wetcharging process, the charging water of plates and the water used in cleaning equipments are collected and then treated in the wastewater treatment facility operated by the company. Figure 2 shows the unit operations and processes in the wastewater treatment facility of the company. As shown in Figure 2, the collected wastewater from the resources mentioned above, with a discharge of 300 m3/day, is first transferred to sedimentation tank to remove particles, which have high amount of Pb. The sludge formed in this process is sent to the tank used for the collection of sludge. The cleared wastewater (super-

natant) is then transferred to pH adjustment unit in which lime (CaO) is added (413 kg/day) to raise pH value of the wastewater from 1.3 to 8.59.0. The addition of polyelectrolyte, which is a polymer used to stabilize the sludge, is also accomplished in this unit (900 kg/day). Following up the pH adjustment, aluminum sulfate (Al2(SO4)3) is added as precipitant for the removal of Pb dissolved in wastewater in coagulation and flocculation unit. The sludge formed in this reactor is sent to sludge collection tank and then to filter press to become thicker. The wastewater from the filter press unit is recycled back to mixing process. The sludge is sent to the recycling facility since it contains considerable amount of lead. The wastewater from flocculation unit is discharged to sewage while about 1/6th of the volumetric flow is reused as lead suppressant and in negative drying purposes. Since the hardness of the treated wastewater is high enough to stain

Figure 2. Operations in the wastewater treatment facility

454


the containers, it is not possible using it as cooling water or cleaning water for equipments. In cases it is used in wet-charging, white traces will be left on the surface of containers. Hard water is not preferred for cleaning the equipments since it reduces the performance of detergents used. Therefore, using another chemical to adjust pH instead of CaO, for example NaOH, may decrease the water consumption. The hardness of water is mainly caused by divalent or trivalent ions, Mg2+ and Ca2+, and water can be softened by chemical precipitation technique (Patterson, 1985, 220-226). If the chemical (CaO) used for pH adjustment is replaced by another chemical containing an ion, which does not cause any additional hardness, then the treated wastewater can be recycled back to the production system to be used in wet-charging, cleaning, etc. This change is expected to decrease the water consumption of the company significantly. To be able to compare the benefits of using NaOH instead of CaO, there is a need to find out the amount of NaOH required to neutralize the wastewater containing H2SO4 and to raise its pH to 8.5. Calculation of CaO and NaOH Amounts: The theoretical calculation of the amounts of CaO and NaOH to be added to neutralize the wastewater containing 496 mg SO42-/L (5.2 x 10-3 mol SO42-) and to adjust the pH to 8.5 requires the following assumptions: 1. The ionic strength of the wastewater is very low, so that the influence of other ions in concentration estimations can be ignored. 2. The temperature of the wastewater is 25°C. 3. Dissociation of Ca(OH)2, which is the product of a reaction between CaO and H2O is complete. CaO (s) + H2O → Ca(OH)2 (aq) ……(Reaction 1)

4. The dissociation of NaOH in H 2O is complete. NaOH → Na+ + OH-……………... (Equation 1) 5. The CaO and NaOH used are 100% pure. Dissociation of H2O: Kw= [H+] [OH-]=10-14 −14 OH−  = 10   [H + ]

Mass balance on Ca2+ and SO42 -: CT,Ca 2+ = [Ca 2+ ] =

number of moles total volume

CT,SO2− = [SO24− ] =


4

Charge Balance: 2[Ca 2+ ] + [H + ] = 2[SO42− ] + [OH − ] 2[Ca 2+ ] + [H + ] = 2[SO42− ] +

10−14 [H + ]

pH=8.5= - log[H+ ] [H+ ]=10−8.5 M [Ca 2+ ] = 5.20 ×10−3 M Therefore, Ca2+ to be added:

Ca(OH)2 → Ca2+ + 2OH-…….....…(Reaction 2)

455


= 5.20 × 10−3

mol m3 L 1 mol CaO (40 + 16) gr 1 kg × 300 × 1000 3 × × × L day m 1 mol Ca 2+ 1 mol CaO 1000 gr

= 87.36 kg

day

The calculated amount of CaO is much lower than the amount added into the pH adjustment tank in the wastewater treatment plant, which is 413 kg/day. The difference is huge, but it could be due to the assumptions made in theoretical calculations especially the grade of the CaO used in the plant, which may be very low. Moreover, the dissociation of CaO and Ca(OH)2 may not be completed in the pH adjustment unit as a result of poor mixing conditions. Mass Balance on Na+ and SO42 -: CT,Na + = Na + 


CT,SO2− = [SO24− ] = 4


Charge Balance: [Na + ]+[H+ ]=2[SO2-4 ]+[OH- ] The equation was similarly solved and the amount of [Na+] was found to be 0.01037 M which corresponds to 124.46 kg/day. The reason for adding more NaOH than CaO is the number

of hydroxyl ions in the compositions of the chemicals. It should be noted here that there is a significant difference in the solubility of NaOH (1,080 gr/L) and CaO (1.39 gr/L) (Dean, 1992). The NaOH can be dissolved in the water in almost instantly requiring mixing enough to sustain the homogeneity of the wastewater. On the other hand, the solubility of CaO is lower than NaOH. In the experiments made in the wet-charging operation, it is seen that caustic does not leave white traces in the surface of containers. Therefore it is feasible to use caustic instead of lime. In addition, with the use of lime, it will be possible to treat and reuse the same water for several days. The wet-charging operation uses 150 tones of water every day; so the reuse of the treated water in wet-charging will remarkably reduce the water consumption. The remaining 150 m3 of refined water may be used in the cleaning of equipments, in the negative drying of plates and as lead suppressant. Table 4 shows the comparison of lime and caustic. Since 100 tones of treated wastewater will be used in equipment cleaning once a day, this amount of wastewater can not be recycled back to production system. Otherwise, there would be a need for tank with capacity of at least 100 tones. Since the water needed in the facility is 300 tones/day, the company will have to use tap water of 100 m3 to clean the equipments each day. In the calculations, it is assumed that 300 m3 of tap water is captured in the first day of the week and 100 m3 of water in each of the remaining 5

Table 4. Comparison of cash flow analysis of the current system and lime alternative Current System

Lime Alternative

Water Usage (m3 /month)

7,200

3,200

Total Cost of Water ($/ month)

15,930

7,080

Chemical Usage (tone/month)

2.1 (0.08735 x 6 x 4)

2.9 (0.124460 x 6 x 4)

Unit Cost of Chemical ($/tone)

76.25

562.5

Total Cost of Chemical ($/month)

160

1,680

Net Present Value ($/year)

174,413

94,957

456


working days of the week. Therefore, the weekly water consumption is: Water consumption = 300 + 5 x 100 = 800 m3/ week. In addition, as calculated previously, it is also known that 124.46 kg/day of caustic will be used instead of 87.35 kg/day CaO. Since no experiment could have been performed using real wastewater to find out the amount of NaOH for adjusting the pH to about 8.5, the comparison of costs of lime and caustic was made based on theoretical calculation of the amounts of chemicals with the assumptions made. The prices of the pure CaO and NaOH are 76.25 $/tone and 562.5 $/tone, respectively. The unit cost of water is 2.21 $/tone. The cash flow analysis of the using caustic instead of lime is compared with the current system in Table 4. As it is seen from Table 4, even though the unit cost of caustic is greatly higher than lime, this alternative gives lower costs because it significantly reduces the water consumption by allowing the reuse of the refined wastewater. A high cost saving is obtained with the use of this alternative. The net present values of the current system and the suggested alternative are calculated for one year, as seen in Table 4. The costs are assumed to derive at the end of each month and the monthly interest rate is taken as 1.6%. When comparing net present values, it can be seen that the suggested

alternative decreases costs by 45% compared to the current system.

Comparison of Alternative Waste Management Solutions Table 5 shows the suggested alternative waste management solutions and the environmental and economical benefits that can be obtained by using them in the company. As seen in Table 5, it was demonstrated that the formation of dross which is the biggest waste problem of the company could be decreased by 30% by using a flux during dross collection. Since the waste was reduced at the source, the waste and recycling costs could be significantly decreased, and most importantly, a very big quantity of lead (Pb) raw material could be recovered consequently. The reuse of the treated wastewater was also a good alternative for the company since a very high quantity of water is used and wasted every day due to production requirements. By using caustic instead of lime, the company could reduce its weekly water usage up to 44%, which would make a considerable decrease in environmental impacts and operating costs. Table 6 shows the difference in waste management costs when quantity of wastes are decreased according to the suggested alternative waste management solutions. It can be seen in Table 6 that a cost improvement of 63% is achieved by

Table 5. Suggested solution alternatives and advantages Wastes

Alternative

Environmental Advantages

Economic Advantages

Dross, excess parts and rejected grids from grid casting

Â€Â€Addition of Excess Parts and Rejected Grids in Batch Mode

Â€Â€Waste reduction at source

Â€Â€Cost Reduction: 94,631 $/year.

Â€Â€Separate Pure Lead From Dross With Vitaflux

Â€Â€Waste reduction at source. Recovery of raw material from the waste at source.

Â€Â€Recovery of 70,848 kg Pb/year.


Â€Â€Recovery of 44,280 kg Pb/year. Â€Â€Recovery of 1,934 kg Pb/year. Refurbished battery from battery closing

Â€Â€Change the Production Schedule

Â€Â€Waste reduction at source.

Â€Â€Cost Reduction: 197,231 $/year

Treated wastewater from the wastewater treatment facility

Â€Â€Use Caustic Instead of Lime

Â€Â€Usage of water decreased by 52,000 m3/year.


457


Table 6. Comparison of waste management costs Waste

Current Waste Management Cost ($/year)

Waste Management Cost of Suggested Alternative ($/year)

Cost Improvement

207,240

10

96%

203,552

108,920

47%

ON-SITE RECYCLED WASTES Refurbished Battery OFF-SITE RECYCLED WASTES Dross of grid casting WASTEWATER Wastewater

174,413

*94,957

46%

TOTAL COSTS

585,205

108,930

82%

* The addition of excess parts and rejected grids in batch mode is taken into basis

implementing all the alternative waste management solutions suggested. The calculation of the waste management cost of the suggested alternative for the dross obtained in grid casting operation is based on the alternative waste management solution covering the addition of excess parts and rejected grids in batch mode.

FUTURE RESEARCH DIRECTIONS It is believed that several new approaches and techniques can be added to improve this methodology in the future. A decision support tool can be designed for calculating and comparing costs and benefits of solution alternatives. By using such a decision support tool, the unit costs and unit profits can be saved in the system and costs of solution alternatives can be easily calculated. It will be also possible to define criteria and give weights to them in order to compare the operational, technical, economical and environmental characteristics of solution alternatives. Implementation of this environmentally integrated manufacturing system analysis in a different sector or company will also provide important inputs for improving the system and understanding its capabilities.

458

CONCLUSION This study has introduced an environmentally integrated manufacturing system analysis methodology for companies willing to be a part of the sustainable development by efficiently using the principles of “cleaner” production techniques in obtaining high productivity levels. The wastes derived from the manufacturing process should be minimized in order to reduce the amount of raw materials used and decrease the need for wastes’ recycling. The problem considered is the investigation of a systematic methodology decreasing the waste obtained from the manufacturing process while simultaneously improving the overall performance of the company. This methodology is important in being a roadmap for the evaluation of environmentally friendly and economically favorable alternative waste management solutions. By using this methodology, the manufacturing and waste management system of a company can be analyzed, alternative waste management solutions for decreasing wastes can be investigated, evaluated and compared.


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Klassen, R. D., & McLaughlin, C. P. (1993). TQM and environmental excellence in manufacturing. Industrial Management & Data Systems, 93(6), 14–22. doi:10.1108/02635579310040924 Klassen, R. D., & Whybark, D. C. (1999). The impact of environmental technologies on manufacturing performance. Academy of Management Journal, 42(6), 599–615. doi:10.2307/256982


Nevin, R. (2007). Understanding international crime trends: The legacy of preschool lead exposure. Environmental Research, 104(3), 315–336. doi:10.1016/j.envres.2007.02.008 Rosselot, K. S., & Allen, D. T. (2002). Environmentally conscious design of chemical processes, chapter 10: Flowsheet analysis for pollution prevention in green engineering, Upper Saddle River, New Jersey, Prentice Hall Russo, M. V., & Fouts, P. A. (1997). A resourcebased perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3), 534–559. doi:10.2307/257052 Schroeder, R. G. (1993). Operations management. New York, New Jersey: McGraw-Hill. Shrivastava, P. (1995a). Environmental technologies and competitive advantage. Strategic Management Journal, 16(3), 183–200. doi:10.1002/ smj.4250160923 Shrivastava, P. (1995b). The role of corporations in achieving ecological sustainability. Academy of Management Review, 20(4), 936–960. doi:10.2307/258961 Spengler, T. (1997). Environmental integrated production and recycling management. European Journal of Operational Research, 97(2), 308–326. doi:10.1016/S0377-2217(96)00200-7

KEY TERMS AND DEFINITIONS Sustainable Development: Meeting the needs of the current generation without compromising the ability of future generations to meet their own needs. Pollution control methods: Methods covering the elimination of pollution after the waste is generated. Pollution Prevention Technologies: The modification or redesign of the production process and the introduction of new technologies throughout the product life-cycle, which contributes to the development of new internal routines and know-how’s. Cleaner Production (CP): The continuous application of an integrated preventative environmental strategy to processes, products and services to increase efficiency and reduce risks to humans and the environment. Eco-efficiency: A management philosophy that encourages business to search for environmental improvements which yield parallel economic benefits. Environmental operations management (EOM): The integration of environmental management principles with the operations management process for the conversion of resources into usable products.

Stefanis, S. K., Livingston, A. G., & Pistikopoulos, E. N. (1997). Environmental impact considerations in the optimal design and scheduling of manufacturing processes. Computers & Chemical Engineering, 21(10), 1073–1094. doi:10.1016/ S0098-1354(96)00319-5

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Section 5

Regional Development

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Chapter 24

The Impact of Electricity Market and Environmental Regulation on Carbon Capture & Storage (CCS) Development in China Zhao Ang Freelance Researcher, Belgium

ABSTRACT Carbon Capture & Storage (CCS) has been regarded as a significant mitigation strategy to tackle global warming although the uncertainties of carbon price and CCS technology exist. Given that China is the biggest coal consumer and around four fifths of its electricity comes from coal power plants, many think CCS has to plays a central role in cutting the carbon emission of China’s coal power fleet. Most existing researches on CCS development in China emphasize the importance of sufficient funding, technological access, and market readiness, but put little light on the role of environmental regulation and electricity market establishment. This chapter examines the impact of Chinese electricity market establishment and environmental regulatory institution on CCS. This chapter argues that Chinese government should protect Intellectual Property Right (IPR), liberalize electricity market, and enforce environmental regulation in order to harvest CCS benefits successfully.

INTRODUCTION CCS in Process “Carbon Capture and Storage (CCS) is a process consisting of the separation of CO2 from industrial and energy-related sources, transport DOI: 10.4018/978-1-60960-531-5.ch024

to a storage location and long-term isolation from the atmosphere”(IPCC, 2005, p.3). The Intergovernmental Panel on Climate Change (IPCC) regards CCS as an important transitional technology to stabilize carbon concentration in the atmosphere(IPCC, 2005). CCS can be applied in various energy and heavy industries, including coal, oil, natural gas, power, steel, and cement, but power sector has the


The Impact of Electricity Market and Environmental Regulation on Carbon Capture & Storage (CCS)

biggest potential to cut carbon emission because about half global electricity production comes from coal power plants and coal combustion has higher carbon dioxide concentration. CCS is still in the stage of Research, Development and Demonstration(RD&D) due to technological and economic challenges as well as uncertain impacts on environment and public health. Although large-scale commercial coal power CCS project with 250 MW capacity or more, has not been successfully deployed commercially, dozens of demonstration projects are implemented. Most of them are undertaken by companies from North America, Europe, and Australia. That is because developed countries have financial and technological advantages in developing CCS. In 2008, the G8 countries planned to put billions of dollars to support 20 large-scale CCS demonstration projects by 2010(E3G, 2009).

Cost of CCS The calculation of CCS cost is very complicated because its cost is determined by so many factors, including power generation technology, carbon capture approaches, transporting distance and methods, geological situation, storing approaches, as well as international carbon market, environmental regulation, and other energy resources’ prices. An estimate about the cost of Pulverized Coal with capture and geological storage is US$0.060.10/kWh (IPCC, 2005). China’s electricity generation in 2008 was 3221.798 billion kWh, four fifth of which came from coal power plants. If two thirds of coal electricity is generated by the plants with CCS till 2050, the cumulative investment of CCS projects would be around US$ 97-161 billion through to 2050. Hamilton (2009) builds up an analytical framework to compute the cost of coal power CCS projects with Supercritical Pulverized Coal(SCPC) Boiler technology from 2010 to 2050 in the United States. Regarding the gradual cost reduction and

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stably growing carbon price, the analysis shows that the cumulative cost gap between the cost of CCS projects and the carbon credits received from carbon market ranges in US$20-301 billion in 2010-2050 in the United States. This estimate can be a reference for China’s CCS development cost in the same period as China and America have the similar coal power dominance in electricity market, close combustion technology and immense carbon storage capacity. American estimation shows that developing coal power plants with CCS in China would be very costly.

CCS Development in China After becoming the global carbon emission leader in 2007, China has paid more attention to CCS. China is one of the biggest potential consumers of CCS technology. With CCS, China’s coal power industry is supposed to reduce 1.2Gt CO2 a year by 2050(IEAa, 2008). Given that China’s coal power plants account for 82% of carbon emission form energy use in 2008(EIA, 2008), CCS deployment in China makes big difference in tackling global warming in decades to come. There are quite a few small-scale CCS projects across different industries, but large coal power CCS projects in demonstration are mainly two: GreenGen and Shenhua CtL (Table 1). Both have strong connection with clean coal technology because the technology is prioritized in China’s energy security strategy in the medium and long term (Morse et al., 2009).

Challenges to CCS Development in China CCS development in China have some controversial advantages such as inexpensive human capital, business-friendly regulation and policy, and rich storage sites. Ironically, to large extent, these so-called advantages have enabled China to grow carbon intensified heavy industries in large scale and in rapid pace over the past two


Table 1. China’s major large-scale industrial CCS demonstration projects Project Feature

GreenGen (Tianjin)

Shenhua CtL (Ordos Basin, Inner Mongolia)

Coal combustion tech.

Integrated Gasification Combined Cycle

Coal to synfuels (direct coal liquefaction)

Capture capacity & method

250MW, up to 650MW; pre-combustion capture.

1 million ton liquid transport fuel/year; during the liquidation process

Storage target & method

Sequestration with Enhanced Oil Recovery (EOR)

saline aquifer and depleted oil fields, EOR;3.6 million metric ton/year; 20 years period

Developers

8 largest state-owned energy companies

Shenhua Group

International partners

Peabody Energy (US)

West Virginia University, US Depart. of Energy

Investment (UD$ billion)

1

1.4

Timeline

Phase I(2006-09): IGCC; Phase II(2010-2012): 250 MW IGCC plant, CCS; Phase III(2013-2015):650 MW IGCC with capture in 2013; added EOR CCS in about 2015

Operational CCS till 2011

Potential to wide application

high

low

Source: Morse et al., 2009; Zhao, 2009; Friedmann, 2009; CAP, 2009.

decades. The industrial sector has accounted for about two thirds of primary energy consumption annually since 1980. The annual average growth rate of the industrial sector’s energy consumption in 1991-2006 was nearly 29% higher than the one in 1980-1990(Ni, 2009, p.87). This is one of major reasons why China has become the biggest carbon emitter years earlier than expected. China’s energy intensity, primary energy consumption per unit of GDP grew quickly from 2001 to 2005 according to the International Energy Statistics of U.S. Energy Information Administration. Even if the 20% target of energy intensity reduction by 2010 on the 2005 level is met, the energy intensity in 2010 would be close to the one in 2001. Therefore, the 20% policy can largely be understood as an urgent measurement to balance the declining economic growth efficiency in 2000-2005. It could be too simple to conclude that China has a good policy circumstance to develop CCS. Some studies realize the deterrents such as transportation bottleneck of coal, the big gap between CCS cost and available financial resources, energy security concern, Intellectual Property Right (IPR)

issue and risk of increasing energy price(Morse, et al, 2009; E3G, 2009). However more significant barriers are those institutional ones. The problem of funding gap is not whether future global carbon market and international mitigation mechanism such as Clean Development Mechanism(CDM) may provide enough money, but whether China’s domestic policy and institutional setting are able to offer both effective and efficient support to fill the funding gap. For example, not raising electricity price, but cutting high profit rate of state-owned power and grid companies, is effective policy to advance CCS development in China though this policy would meet great institutional challenge from electricity market establishment.

IMPACT OF ELECTRICITY MARKET ESTABLISHMENT The electricity sector is the main field to deploy CCS, so the institutional arrangements in the electricity market are assumed to have significant influence in CCS development.

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Electricity Market

Impact on CCS Funding

China’s power sector as a whole is an oligopolistic market although in 2002 the government attempted to disintegrate the country’s generating and transmission parts. The reform has made little progress. Foreign and private investors occupy a marginal market share (IEA, 2007). The electricity sector is dominated by nine large state-owned power companies. The majority of these giants’ assets are coal power plants. Most coal power plants use subcritical coal combustion (E3G, 2009). China’s Power transmission, distribution and retail sales are monopolized by State Grid and China South Grid. Although China’s electricity prices vary in different provinces, China’s electricity price level is comparatively higher than many OECD countries if the national average income level is taken into account. In 2010, China’s average electricity price for households is US$0.079/kwh (assuming exchange rate 1:6.83) according to the National Development and Reform Commission (NDRC, 2007 & 2010). The electricity price for U.S. households in 2007 is US$0.106/kwh based on the statistics from the Energy Information Administration. Farmers usually pay more than urban people. The service sector pays much higher than the industrial sector. In some provinces, this difference is up to 40-50% of electricity price. The comparative high electricity price is one of signals for the monopolistic electricity market. Another indicator is that the power generation sector has much higher level of corporate profits and wages than the social average level. In addition, the huge amount of governmental subsidies go to state-owned power companies in China. According to World Energy Outlook 2008 (IEAb, 2008), China’s subsidies in coal and electricity sector was more than US$12 billion in 2007. The electricity market liberalization reforms will benefit social well-being as a whole by both cutting the huge government subsidies and breaking market monopoly.

When CCS is assumed to be largely adopted by coal power plants in the future, technology and funding are among the top considerations of coal power plants. The financial resources for CCS may come from three channels, (1) avoided carbon credits from international carbon market or Clean CDM; (2) bilateral or multilateral international collaborative funds such as EU CCS Knowledge Sharing Program and G8 CCS initiatives for developing countries; (3) domestic policy incentives, for example, fiscal loans or tax break. Channel (1) and (3) are supposed to be the main sources to finance CCS projects in the long run. Thanks to the fluctuation of international carbon price, this article focuses on channel (3). China government might face three major options in order to fulfill the Channel (3). First, increasing subsidies to coal power industry; second, improving electricity price; third, controlling the profits and wage level of state-owned power giants. The three policies face different difficulties to implement. On the one hand, the first and second options will sacrifice the national welfare because the invested interests of state-owned companies are strengthened. On the other hand, the third option is the most difficult one to run. It is well known that Chinese government regards electricity industry as strategic industry. The electricity sector is one of biggest contributor to national tax income. The usual positions shift between the company leaders and senior regulatory officials naturally gives the state-owned electricity companies the unique capacity in influencing policy agenda. The past experience also indicates that the suggestions of breaking the sectoral invested interests have not brought any productive results. From this point of view, CCS funding faces a serious challenge from the entrenched electricity market establishment.

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CCS and IPR Fossil fuel sector regards CCS as both a business opportunity and survival solution in global climate regime. The opportunity means making money from trading CCS technology. The survival solution can secure a living with future low carbon economy. This concern may explain why most fossil fuels companies around the world, particularly coal power plants, have actively attended the movement to develop CCS. Chinese state-owned coal power giants have also realized this point and invested in CCS R&D and clean coal technology with the financial supports from central government. Some international aids from government, academic and business organizations also join the CCS RD&D in China. Through international cooperation, Chinese coal power companies expect to hold some core CCS IPR in the competition of RD&D. Meantime, international partners would have good understanding of China’s institutional context and energy market. The understanding will assist international partners to acquire interests in future China CCS market. However, the current international partnerships on CCS are mainly about knowledge sharing and capacity building rather than significant innovation activities. That is because developed countries have strong concern on IPR protection in China. The typical argument is that in industrial countries, private-public partnership is widely applied to develop CCS and involves with colossal investments. This situation usually makes CCS technology transfer to China costly. Both the lack of financial resource and the weak record of IPR protection in China restrict the future CCS technology transfer (E3G, 2009). Strong IPR protection leads to abundant innovation activities and fruitful outcomes, but poor IPR protection discourage technological innovation. IPR protection interacts with market competition situation. A free market encourages fair and powerful IPR protection. A monopoly or oligopolistic market often deters IPR protection as well as technological innovation. China’s electric-

ity market just plays such a role in discouraging the innovation of electricity technology. Companies prefer to fight more market share rather than innovate state-of-the-art technology. Over the past three decades of rapid economic growth, China has not produced any world leading power technology though China is the second largest power producer in the world. China’s annual R&D investment has kept a growing pace in the past decade and will reach 2% of Gross Domestic Product in 2010. The vast investment and encouraging policy have caused significant growth of IPR filling and grants but the majority of high-tech inventions are still owned by foreign firms from developed countries. What Chinese companies have are mainly noninvention patents, like utility model and design (E3G, 2008).

ENVIRONMENTAL REGULATION’S IMPACT ON CCS IN CHINA CCS’s Environmental Impacts The entire process of CCS application, from capture, transportation to storage, may produce various social and environmental consequences. In the capture stage, CCS projects usually have proportional increase of solid waste and water use due to more fuel consumption. The majority coal combustion technologies with CCS have higher air pollutant emission rates per MWh than those without CCS. While sulphur dioxide emission decreases, NOx and ammonia emission increase (WRI, 2008). The increase of NOx and ammonia may lead to negative effect to water bodies, for example eutrophication and decline of water quality (Koomneef et al., 2008). In addition, the noticeable loss of energy efficiency happen both in new coal power CCS projects and CCS retrofits (WRI, 2008). In the transportation and storage stages, CCS projects have the risk of leakage over the ground and under the ground. The potential effects include

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ecologically sensitive areas, seismically active areas, underground water bodies, and populated communities. Besides improving technology in RD&D activities, effective regulations are placed to control and reduce those impacts and risks. Some developed countries have worked hard on the issue because of the monitoring pressures from legislature, civil organizations and affected communities. The effort has resulted in some outcomes, like CCS Guidelines and CCS Ready Policy. The CCS Guidelines is an initiative “to develop a set of preliminary guidelines and recommendations for the deployment of CCS technologies in the United States, to ensure that CCS projects are conducted safely and effectively.”(WRI, 2008, p.8). CCS Ready Policy is a policy concept in which “carbon-emissions-intensive plants are encouraged or required to prepare for CCS during their design and planning phases so they are ready to retrofit CCS at a later date.” (GCCSI, 2010, p.1). Both of them show the importance of environmental regulations in CCS demonstration and future commercial development. Some international collaborative projects address China’s CCS regulatory framework, including STROCO2 project (EU, 2010), CCS Guidelines in China (WRI, 2009). However, the features of Chinese environmental regulation and the relationship between environmental regulation and large stateowned companies have not been analyzed. The existing researches on CCS regulatory framework in China focus more on the operational level of policy reform. (E3G, 2009; CAP, 2009 & WRI, 2008)

China’s Environmental Regulation Failure and Institutional Rationale China’s environmental watchdog, the State Environmental Protection Administration, has failed to fulfill its responsibility to provide a healthy environment for the society. China homes many of most air polluted cities around the world. More than half of major overground water bodies have

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been seriously polluted. Ironically, China has adopted ambitious air quality standards, which, in some elements, are even stricter than those of the United States (Hayward, 2005). It is evident that a big gap exists between environmental regulation and enforcement. To address the gap, some scholars suggest a series of policy reforms, including detaching local environmental agency from local government, removing local governmental impact on courts, setting up environmental public interest legislation and offering an effective procedure for public participation in environmental lawsuits and other activities (Wang, 2007). However, these policies cannot change the structural primacy of economic development against social and environmental justice. The primacy is based on a self-interest motivation that the endless economic booming can justify the legitimacy of one-party ruling. Therefore environmental regulation serves for securing the ruling position rather than addressing public interests, such as environmental protection. The conflicts between the two ends are inevitable, but environmental regulation rarely wins. For instance, in 2005 - 2009, a few regulation campaigns by the State Environmental Protection Administration aimed at big state-owned companies that disregarded the Environmental Impact Assessment (EIA) Law in many large power and heavy industrial projects. The projects were suspended for a while. But most power projects owned by state-owned power giants were resumed not long after the firms just submitted the EIA reports. However, affected local communities and civil society organizations cannot participate in reviewing the EIA reports and usually have no access to the complete EIA reports. Environmental regulation will not make difference if political freedom does not function well. The historic experience in developed countries in 1960s and 1970s have demonstrated the strong link between political freedom and environmental performance (Hayward, 2005). Political freedom can guarantee government accountable to


public concerns on environmental quality. More importantly, political freedom is able to uproot authority’s self-interest motivation on legitimacy. Meantime, political freedom can also return people the right to monitor the quality of regulation and protect themselves from environmental dangers with independent legal means. All CCS guidelines introduced in developed countries all address the issue about public participation in CCS projects planning. The confrontations between developers and local communities have taken place in some European and American CCS projects (GCCSI, 2010). The solution must compromise all parties’ concerns. Nowadays, those self-organized local communities or Non-governmental organizations (NGO) in China have fought their rights, but have to face suppression from the authority in name of social stability and public security. In the past years, Chinese government has taken stricter measures to suppress active individuals and organizations even though across the country thousands of protests against environmental pollution and social injustice take place each year. Few of them have been addressed properly. As for CCS, a complicated technology relating to various natural and policy environment, an effective environmental regulation can limit the negative consequences caused by CCS projects. However, the deadlock of one-party rule in China’s political institution deters a constructive and effective environmental regulation.

POLICY RECOMMENDATIONS There exist significant systematic risks in China’s environmental regulation institution and electricity market establishment. Without finding out solutions to remove or undermine the systematic risks, CCS’s development may not bring a result that people usually expect, but compromise social justice and environmental sustainability. First, the government should make electricity market

real open and competitive. This may reduce rent seeking possibility and avoid regulatory capture by dominating state-owned electricity companies. Second, civil rights of local community, NGOs and environmental groups should be secured. This institutional provision is significant to fight the potential social and environmental negatives from CCS projects particularly when government fails to seriously take into account the concerns and interests of local people and environmental common goods. A tactical policy can be setting up a special public fund to deal with future accidents caused by CCS projects. The fund may come from taxing relevant actors getting profits from CCS projects and from a certain portion of fiscal funding. The fund has to be monitored by public. The decision making related to the fund should be participated by civil society organizations. The establishment of special fund is to make major social stakeholders work together to address the risks of CCS projects. Above all, the two policy strategies are kinds of deep institutional reforms and must not be achieved easily. However, if the reforms are successful, the beneficiaries will go beyond climate protection.

CONCLUSION By examining the impact of China electricity market establishment and environmental regulatory institution on CCS, this paper argues that CCS development may face significant challenges from electricity market and environmental regulation. The solutions in policy level include protecting IPR, freeing power market, and enforcing environmental regulation. To ensure these policy solutions successful, returning political freedom to people can be a long term reform objective. This institutional change should secure China’s effort to fight global warming with help of various means and technology, such as CCS. The future study may seek more sound evidence

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from China’s climate change policy and practice to support the argument that political freedom rather than technology change make difference in fighting climate change in such developing countries as China.

REFERENCES

Intergovernmental Panel on Climate Change (IPCC). (2005). Summary for policymakers. In IPCC Special report: Carbon dioxide capture and storage. Cambridge, UK: Cambridge University Press. International Energy Agency (IEA). (2008a). Energy technology perspective: Scenario and strategies to 2050. Paris, France: OECD/IEA.

Center for American Progress (CAP). (2009). A roadmap for US-China collaboration on carbon capture and sequestration. Washington, DC: CAP.

International Energy Agency (IEA). (2008b). World energy outlook 2008. Paris, France: OECD/ IEA.

Energy Information Administration. (2008). CO2 emission from the consumption of energy in international energy statistics. Washington, DC: EIA.

Koornneef, J., & Van Keulen, T., A. F., & Turkenburg, W. (2008). Life cycle assessment of a pulverized coal power plant with post-combustion capture, transport and storage of CO2. International Journal of Greenhouse Gas Control, 2(4), 448–467. doi:10.1016/j.ijggc.2008.06.008

EU. (2010) STROCO2 project. Retrieved from www.euchina-ccs.org Friedmann, S. J. (2009). A US-China CCS roadmap. US-China Coal Conversion and Carbon Management Workshop. Retrieved from http://www. nrcce.wvu.edu/ CleanEnergy/ docs/ NRCCE_USCHINA_ WORKSHOP_ presentation-agenda.pdf Global, C. C. S. Institute (GCCSI). (2010). CCS ready policy: Considerations and recommended practices for policymakers. Retrieved from http:// www.globalccsinstitute.com/ general_information/ reports_papers_documents.html Hamilton, M. R. (2009). An analytical framework for long term policy for commercial deployment and innovation in carbon capture and sequestration technologies in the United States. Unpublished Masters thesis, Massachusetts Institute of Technology. Retrieved from http://sequestration.mit. edu/ pdf/ MichaelHamilton_thesis_dec2009.pdf Hayward, S. F. (2005). The China syndrome and the environmental Kuznets curve. Environmental Policy Outlook Nov.-Dec. Washington, DC: American Enterprise Institute International Energy Agency (IEA). (2007). World energy outlook 2007: China and India insights. Paris, France: OECD/IEA.

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Morse, R., Rai, V., & He, G. (2009). The real drivers of carbon capture and storage in China and implications for climate policy. Working Paper 88, Program on Energy and Sustainable Development at Stanford University. Stanford, CA: Stanford University NDRC. (2007). 2006 provincial electricity price levels of end-user and on-Grid. Retrieved from http://www.ndrc.gov.cn/ jggl/ jgqk/ t20070716_148636.htm NDRC. (2010). The notice to national electricity price adjustment. Retrieved from http://www.ndrc. gov.cn/ xwfb/ t20091119_314253.htm Ni, C. (2009). China energy primer. A report from the U.S. Ernest Orlando Lawrence Berkeley National Laboratory (LBNL-2860E). Retrieved from http://china.lbl.gov/sites/china.lbl.gov/ files/ LBNL-2860E. China_Energy_Primer. Nov2009. pdf Third Generation Environmentalism. (E3G). (2008). Innovation and technology transfer. London, UK: E3G/Chatham House.


Third Generation Environmentalism. (E3G). (2009). Carbon capture and storage in China. Berlin, Germany: Germanwatch. Wang, C. (2007). Chinese environmental law enforcement: Current deficiencies and suggested reforms. Vermont Journal of Environmental Law, 8. World Resource Institute (WRI). (2008). CCS guidelines: Guidelines for carbon dioxide capture, transport, and storage. Washington, DC: WRI.

World Resource Institute (WRI). (2009). Ensuring safe carbon capture and storage in China. Retrieved from http://www.wri.org/ stories/ 2009/ 03/ ensuring-safe-carboncapture-and- storage-china Zhao, Y. (2009). GreenGen-near zero emissions coal based power demonstration project in China. 2009 US-China coal conversion and carbon management Workshop. Retrieved from http://www. nrcce.wvu.edu/ CleanEnergy/ docs/ NRCCE_USCHINA_ WORKSHOP_ presentation-agenda.pdf

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Chapter 25

A Critical Assessment of Environmental Degeneration and Climate Change:

A Multidimensional (Political, Economic, Security) Challenge for China’s Future Economic Development and its Global Reputation1 Christian Ploberger University of Birmingham, UK

ABSTRACT China and its population are confronted with fundamental environmental challenges, as both environmental degeneration and the impact of climate change exhibit critical political, economic, and social implications for their future development. Among the various environmental challenges China faces, this chapter identifies pollution issues, soil erosion, acid rain, and sea-level rise. This variety of environmental issues increases the underling complexity of how best to address these challenges, especially as China’s growth strategy has the potential to exacerbate the negative impact on the environment further. Hence the question which development strategy China will follow–a ‘growth first and clean up later’ or ‘cleaning up while growing’–carries serious implications not only for the environmental situation in China itself, but for the international community as well. It is crucial to recognize that China’s multidimensional environmental challenges also carry critical implications for China’s international reputation. DOI: 10.4018/978-1-60960-531-5.ch025


A Critical Assessment of Environmental Degeneration and Climate Change

INTRODUCTION China’s economic growth rate since the reform process began is extraordinary and generated a fundamental positive impact for the livelihood of millions of Chinese people by providing economic benefits and prosperity. However, several social and economic challenges remain, as these economic benefits are neither equally distributed among China’s population nor within China’s vast territory. Consequently, we can identify both a rural-urban divide as well as an increasing gap of economic development within and between provinces. In addition, various new challenges emerged, one such critical challenge, which has become increasing prominent over time, is the environmental issue. The potential negative implications climate change has on China’s future development and on the quality of life of China’s population will almost certainly intensify in the years to come. Yet, the environmental question represents a complex issue with far-reaching implications and various aspects need to be addressed. Among them, we can identify: the nature of environmental degeneration; its close link with development and the inherent political implications and challenges faced when addressing issues of environmental degeneration; as well as the international dimensions of various environmental issues. In this context, identifying the historical and social origins of specific environmental challenges are of crucial importance for developing a comprehensive understanding into the challenges faced, highlighting that environmental challenges not only inherent a political-economic dimension but a social dimension as well. Consequently, addressing specific environmental challenges will not only require economic-technical solutions but may also require addressing underlining socialpolitical dimensions as well. This chapter will evaluate the underlining challenges environmental degeneration and climate change pose for China’s future development, and will begin with an evaluation of the challenges

in identifying and communicating environmental issues before proceeding with an assessment of China’s specific environmental challenges. It will thereafter address the related developments and potential political implications. Although one may argue, as the Copenhagen Summit did not produce binding international agreements, the immediate pressure in addressing environmental concerns decreased for the Chinese government. Instead, I argue, that such a view is misguided, as the environmental challenges China faces are as real as ever and will intensify in their political, economic and social implications as will the pressure on the Chinese government to address these issues. The essay will conclude with a comprehensive assessment of the national Eleventh Five-Year Plan (FYP) (2006-2010) and will consider the security and international implications of China’s environmental challenges.

THE UNDERLINING COMPLEXITY OF THE ENVIRONMENTAL ISSUE: SCIENTIFIC PROBABILITIES; POLITICAL AGENDAS AND THE CONCRETENESS OF SPECIFIC ENVIRONMENTAL ISSUES When addressing and evaluating the complexity of the environmental issues, it is crucial to identify certain fundamental and critical issues from the onset. One such fundamental issue within the environmental impact debate relates to the ongoing and critical discourse, regarding two critical agendas: one is scientific the other is political. The scientific agenda relates to the authoritative assessment of a specific threat scenario, whereas the political agenda focuses on the formation of concern in the public sphere and the allocation or non-allocation of resources in dealing with specific environmental challenges.2 It is crucial to be aware, that both agendas inherit a critical role considering the perception and the response towards particular environmental issues. Take

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for example the scientific agenda, as scientific work is not only characterized by complexity but also by probabilities, scenarios and uncertainties, scientific findings are harder to communicate. Equally critically, establishing a scientific link between climate change and the specific impact it has, for example on extreme weather patterns, still proves a challenging undertaking, albeit more indicators are pointing towards the existence of such a link. Yet, this challenge of establishing a scientific link between a specific environmental issue and its potential impact, does not apply to all environmental issues to the same extent. Take for example water or air pollution issues, establishing a scientific link between the source of a specific pollution issue and identifying its specific impact is a rather more straightforward undertaking. However, challenges may exist in identifying the sources of a cross-border pollution issue, albeit this connotes a lesser challenge as compared to establishing a scientific link between climate change and its impact on a specific locality. It is critically to emphasize that the challenges related in establishing a scientific link between climate change and its specific impact on various localities should not be instrumentalised to question the occurrence of climate change as such. Overall, both the actual impact generated and the potential further impact climate change will have on different communities worldwide becomes increasingly acute and inherent the potential of affecting the livelihood of millions of people. It is this underlining topic of the potential social, economic and political implications of environmental degeneration and climate change, which is at the heart of the environmental impact debate. Although we can identify a wide range of environmental topics, among them - acid rain; air, water and marine pollution; deforestation, soil degradation as well as desertification; stratospheric ozone depletion and climate change – they all have in common a negative impact on people and their livelihood. It is equally significant to be aware that environmental degeneration is neither uniform - varying in scope

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between local, regional or global - nor even in the intensity of its impact. It is worth recognizing that this also applies to global environmental threats such as global warming as well. This highlights another critical aspect, the issue of burden sharing between countries, as some countries are more exposed to the negative impact of climate change, albeit they may contributing only limited emissions to the accumulated global greenhouse gas emissions.3 Such scenarios certainly increase the complexity of the environmental issue further. However, the specific impact within a defined geographical area is of critical relevance when assessing its impact and the degree of political response a specific environmental issue commands. Essentially, we can distinguish between two categories of impacts: concrete ones, where the impact is felt immediately and cases of slowly developing impacts, where the extent of this impact may be felt at a later stage or by future generations. The urgency as well as the geographical scope of a specific environmental issue will inform the response to it, as dealing with immediate and local specific threats provide powerful political incentives to act. Pollution issues, accidents involving toxic waste, are examples of concrete environmental concerns where the implications are felt almost instantly. Climate change, however, would be an example of the second category, as it represents a rather complex issue, albeit with more fundamental implications for the livelihood of millions of people, as a specific pollution issue. Yet, when compared with specific and spectacular pollution issues, climate change is still viewed as a non-event, albeit the prediction of sea-level rises does carry concrete and specific local implications for various regions and millions of people around the globe. Hence, climate change represents a rather incremental change, it does not constitute a flashlight effect as for example the impact a tsunami has: a tsunami strikes, its impact is tremendous and instantaneously visible.4 However, as destructive weather patterns, such as the repeated occurrence of increasingly destructive hurricanes


or the El Nino phenomenon, increasing the awareness of the potential negative implications climate change can have, the visibility and awareness of the potential challenges climate change carry will increase as well. However, the above-mentioned challenge of establishing a specific scientific link between climate change and a specific environmental issue represents a particularly prominent topic regarding the relationship between climate change and extreme weather patterns, as it still proves a challenging undertaking to establish a scientific link between them, albeit more and more indications pointing towards the existence of such a relationship. Consequently, although environmental degeneration and climate change representing major political, economic, and social issues they still do not command the serious response they should. Not at least because of the contemporary elusive visibility and the still less apparent causality of their impacts, especially in the case of climate change. Nevertheless, changes in perception are already manifest as both visibility and causality of the implications of climate change increase, with it, the demand of addressing and dealing with it. With the scientific question progressively addressed, it will be easier to mobilize an adequate political response. Nonetheless, visibility and the concreteness of an environmental issue are still of critical relevance when it comes to the mobilization of a political response. After this initial discussion of the underlining issues regarding the environmental question, the following section will focus on the specific environmental challenges China faces.

CHINA’S ENVIRONMENTAL CHALLENGES It is beyond question that China faces a critical and complex environmental challenge, characterized by a range of specific issues. Among them, we can identify: land degradation; water scarcity; water and air pollution; frequent and high intense

environmental accidents; and various forms of climate change impacts. The seriousness of the environmental issue China is confronted with is recognized in the 11th Five-Year-Plan (FYP) for environmental protection by stating: ‘the improvement of environmental quality [represent] an important component for the implementation of the scientific outlook on development and development of socialist harmonious society’ (The National Eleventh FYP for Environmental Protection 2006-2010). The Party and the government also indicating a rather straight forward attitude when assessing the 10th FYP period and the Plans’ failure on several issues in reducing the negative impact on the environment, by pointing out that several of its targets were not met. For example, the target of reducing SO2 emission of 10% were not only not achieved, instead the actual SO2 emission increased by 27,8%. There is also an acknowledgment of the existence of other continuous and severe environmental issues like the quality of drinking water in key cities, the increase in the number of days with haze in various big and medium-sized cities as well as increasing issues of rural soil pollution. (The National Eleventh FYP for Environmental Protection 2006-2010). In many cases, pollution issues - water and air – representing the pressing environmental challenges China’s population is confronted with.5 Even though Figure 1 indicates a decrease in the number of environmental pollution and destruction accidents, it seems that the severity of the accidents increases as the direct economic cost continuously increases, though there was a spike in 2004 (Figure 2). In the case of urban air pollution, which represents a serious pollution issue, Figure 3 indicates that improvements were achieved,. Yet, this positive trend needs further qualification as the data is based on a small sample of thirty-one selected cities. Even as the pollution issue signifies a critical environmental issue for China, this should not negate the increasingly negative impact climate change has on China’s environment and its population.

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Figure 1. Environmental Pollution and Destruction Accidents (Source: Various editions of the Chinese Statistical Yearbook)

Figure 2. Direct Economic Losses (Source: Various editions of the Chinese Statistical Yearbook)

Figure 3. Days of Air Quality (Source: Various editions of the Chinese Statistical Yearbook)

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The challenges climate change pose to China’s environment and its people are addressed in various government reports and White Papers,6 clearly stating the government’s awareness of the vulnerability and urgency regarding the negative implications of climate change (China’s Policies and Action for addressing Climate Change). The White Paper on Policies and Actions for addressing Climate Change also highlights specific areas of concern, by identifying a number of key issues and emphasizes that adverse effects are already identifiable especially within the agricultural sector, regarding the availability of water resources and an accelerating trend of sea level rise (China’s Policies and Action for addressing Climate change). One has also to think of the effects of melting glaciers in the Himalayan region, a trend which is already accelerating, albeit the earlier projected time-frame of 2035, by which all glaciers in the Himalayas are thought to have melted away, may no longer stand up to scrutiny as the current discussion indicates.7 Yet, when evaluating the impact of melting glaciers, we may not only think in terms of reducing the availability of fresh water for millions of people, but also that the very process of melting may lead to increasing instances of flooding with devastating ecological, economic and human costs, not only for China, but for India and Bangladesh as well. This may also remind us that specific environmental issues are not consistent with national boundaries, an issue that will be addressed later in the section on the security dimension of environmental issues. With regard to fresh water resources China already faces water scarcity, yet the situation is more severe in the northern parts of China, compared to the region south of the Chang Jiang. This unequal impact is exaggerated as northern China encompasses almost 60% of China’s farmland.8 In addition, industrial and household pollution further increase the pressure on fresh water resources as well. Land degeneration represents yet another pressing issue for China. However, land degradation has a

variety of origins. Among them we can identify: desertification, deforestation, soil erosion, and salinization. It certainly does not help to diminish the pressure on land and the rural environment that China has to feed 20% of the world’s population with 7% of the world’s farmland.9 Sandstorms (Kosa) representing another critical topic not only at the national level, by negatively impacting on the living conditions of several northern and western provinces in China, but also as a prominent regional environmental concern, in the form of a cross border pollution issue with strong negative implications for South Korea and Japan. Originating in the desserts of northern China and parts of Mongolia, Kosa is related to desertification, with a rooted course in a combination of natural, human induced (overgrazing, population pressure) as well as climate factors. The impact Kosa has on Northeast Asia includes the disruption of electricity supply; respiratory distress; the potential distribution of air pollution over a great area; the loss of fertile top soil; damage to property, business and local and regional infrastructure; to name a few. The impact of global warming will likely add to the intensity and longevity of the Kosa phenomenon, and a series of exceptionally strong storms within a narrow period of years (1998, 2001, 2002, and 2006) raised an increasing awareness of the challenge Kosa represents for China and northern East Asia. In addressing the challenge climate change poses, the 11th FYP for Environmental Protection highlights the connection between development and environmental issues, by stating: ‘The contradiction between socio-economic development and resources and environment constraint becomes increasingly evident’ (The National Eleventh FYP for Environmental Protection 2006-2010). Consequently, promoting sustainable-development represents a crucial goal in addressing climate change and environmental issues. Yet, it is the economic success of the reform period, which significantly increased the pressure on the environment. Here again, we are reminded that envi-

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ronmental degeneration occurs within a specific historical and political-social context and not only within a specific economic-technical context. Especially, but not exclusively, generating sufficient energy provides a clear link with the economic development strategy of the reform period. In addition, as shown in Figure 4, coal provides the principal source for generating energy. This dependence on coal in producing sufficient energy largely contributes to China becoming one of the leading CO2 emitting nations and for fuelling the increasing trend of Global Warming. CO2 also represents a critical issue for urban air quality in many Chinese cities. However, when comparing energy consumption with energy production (Figure. 5) we can identify an emerging gap, which may be interpreted as an indication of increasing efficiency in the use of energy, signaling a critical and positive development. Overall, improving the energy efficiency certainly will help to address both air pollution issues and China’s contribution to the process of climate change. A comparison of the GDP growth rate with the energy production growth rate (Figure 6) signifies that China has managed to disconnect economic

growth and the growth in energy production, which certainly represents a crucial and progressive step, albeit the relationship is not characterized by a singular development as the gap between them varies over time. What is worrisome is the process in the period between 2003 and 2004 where the growth rate of energy production was higher than the GDP growth rate. Although the following years have indicated a return to the former trend, it needs to be seen whether this will be an indication for the years to come. The economic reforms have certainly transformed China and had a fundamental positive impact on million Chinese people by lifting them out of absolute poverty. Yet, this success came at a significant cost and the increasing environmental stress China’s population has to endure is one prominent feature. Critically, as the challenge environmental degeneration represents has to be understood in a wider political and developmental context, the following section will focus on this wider and complex relationships.

Figure 4. Composition of the Energy Production (Source: Various editions of the Chinese Statistical Yearbook)

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Figure 5. Comparison of Energy Production with Energy Consumption (Source: Various editions of the Chinese Statistical Yearbook)

DEVELOPMENT, POLITICS AND THE ENVIRONMENTAL: A MULTIFACETED RELATIONSHIP WITHIN A SPECIFIC HISTORICAL AND SOCIAL CONTEXT In analyzing the complex relationship between development, politics and the environment it is critical to recognize that this relationship exists within a specific historical and social setting and

to remember that guaranteeing economic development and prosperity is a fundamental aim of all governments and contribute to their political legitimacy. The economic imperative becomes especially visible when faced with economic backwardness and economic underperformance. Environmental considerations often sidelined as there exists the perception of a goal conflict between environmental protection and economic growth and prosperity. Yet, this supposed goal

Figure 6. Comparison of Energy Production and GDP growth (Source: Various editions of the Chinese Statistical Yearbook)

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conflict between economic growth and environmental protection is actually more narrow than generally perceived, as investment in environmental protection and in various sectors of the clean energy industry would provide high quality employment at an advanced technological level. In addition, the environmental industry also inherits a strong growth potential. Hence, albeit accepting the crucial importance of economic development for political legitimacy, an economic growth strategy can also incorporate the goal of protecting the environment, thereby limiting the potential negative implications of economic growth on the environment. Critically, which strategy a country selects–cleaning up while growing or cleaning up after successful economic growth–is a fundamental political decision made within a specific historical and social-political environment. Regarding the situation in China, there are strong indications that its leadership has become increasingly aware of the multifaceted, and especially social-political, challenges environmental degeneration represent for China and its population. The National Eleventh Five-Year-Plan for Environmental Protection (2006-2010) emphasizes that the existing focus on economic growth should be replaced with an equal emphasis on both, economic development and environmental protection (The National Eleventh FYP for Environmental Protection 2006-2010). Nevertheless, the development imperative still figures prominently within the Chinese leadership’s considerations, and not without justification as generating economic growth provides a crucial element of the extent of political legitimacy the Chinese Communist Party (CCP) enjoys.10 Hence, addressing the environmental issue also relates to the willingness of a specific government to accept environmental degeneration as a critical issue. Nevertheless, addressing environmental degeneration constitutes a complex challenge for China’s government as sustaining its economic growth strategy not only requires the use of more resources in the future, but in addition, as an increasing part of its popu-

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lation will be in a position to consume more, this too will increase the environmental impact as well. Although these assessments appear rather self-evident, they contain fundamental assertions. Overall, we should not forget that it was not until the late 1980s that an extensive growth oriented economic development model was the focus of almost every government - opening new factories, building new roads, smoking chimneys - were interpreted as the manifestation of development. Equally, increasing consumption was another expression of success. The environmental impact this generated was of secondary relevance, if noted at all. In addition, and of critical importance, both issues – economic growth, and the ability to consume - were also instrumental in providing political legitimacy for many European governments. The situation in contemporary China is almost identical, as economic success, and generating intensive growth as well as the ability of an emerging middle class to consume forms a critical part of the political legitimacy the CCP enjoys. Hence, as mentioned before, identifying the historical trajectories of development and social inspired environmental challenges and putting them in the contemporary context is essential in addressing environmental degeneration successfully. The difference between the situation in Europe up to 1980s and contemporary China are that we are now much more aware of the negative implications of both excessive economic growth and overburdening consumption has on the environment. The very dimensions of China, in both economically and regarding its population, representing an additional and crucial factor that fundamentally contributes to the negative impacts Chinas development has on climate change and on environmental issues. Nonetheless, assessing China’s global environmental impact is not as straightforward as it may appear. Take for example the issue of CO2 emissions, where China overtook the USA in 2006 as the leading global emitter. The country level data presented in Figure 7 clearly indicates that we can identify from the


late 1980s onwards first an accelerating and then from 2000 onwards a dramatic increase of China’s CO2 emissions. The challenge this poses for the global climate system seems obvious and clearly identifiable. China’s increasing industrialization, its incredible economic success and energy needs fundamentally contribute to domestic and global emission, thereby fuelling the processes of climate change. However, we will reach a rather different assessment, when taking into consideration the data provided in Figure 8, which compare China’s CO2 emission with leading industrialized countries on a per capita basis. Here the ranking order changes dramatically, with the United States far in the lead, followed by other highly industrialized countries and China ranking far below them, albeit one also can identify China’s upward trend, but this trend is less dramatic when compared to the data in Figure 7.11 Making a comparison on a per capita basis is essential especially when considering that leading industrial countries not only highlight their economic and social success, which is based on their specific economic and

consumption model, but also encourage other countries to follow their model. Yet, one has to take into consideration the environmental impact this would generate and the future, potential dramatic, implications if developing countries would follow their examples. However, as indicated before, it is critical to acknowledge, that increasing environmental damage should not be accepted as an unavoidable element of economic growth, instead it rather reflect a political choice regarding the selection of a specific development strategy. There are increasing indications for a change of mind within the Chinese leadership as China’s White Paper on Climate Change emphasizes that developing renewable energy resources and optimizing the energy mix representing critical issues in addressing the environmental challenge it faces. Increasing and upgrading China’s windpower potential at an industrial level constitutes such an important goal (China’s Policies and Action for addressing Climate change). The ‘Renewable 2007 Global Status Report’ also indicates that China has already become a leading pro-

Figure 7. Data from: Energy Information Administration–Official Energy Statistics from the US Government (http://www.eia.doe.gv/environment.html)

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Figure 8. Source: World Bank http://www.eia.doe.gv/environment.html

ducer of renewable energy, as it doubled its wind power capacity for the fifth year in a row, becoming the fourth biggest producer of wind power at the global level (Renewable Global Status Report 2007, 2008). In its 2009 update, the Global Status Report points out that in 2008 China overtook Japan as the worldwide leader in photovoltaic cell production (Renewable global Status Report 2009 UPDATE, 2009, p. 8). The fundamental and critical question is if and to what extent diverse sources of renewable energy could provide an alternative source for China’s coal based energy production and equally critically the ability of generating enough energy to keep up with the increasing demand. Another, fundamental issue relates to the crucial question of how long the ‘window of opportunity’ for alternative routes of economic development will exist as economic investment in specific industries will create specific incentives and embedded interests which may forestall a future shift in a country’s development strategy. In this context, Ruth points towards a process of co-evolving of a specific institutional setting for particular industries. Citing the

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example of centralized fossil-fuel based power plants which led to the generation of public/private research facilities for addressing related issues, thereby generating additional vested interests and facilitating a process of development which Ruth describes as, ‘lock in’ systems, consequently forestall a shift in strategy at a later stage (Ruth, 2005, p.162). One may recall the dominant position heavy industry enjoyed in pre-reform China and the political power of the related ministries, to appreciate the implications the selection a specific economic developmental strategy has. Overall, the dominance of the heavy industry was based on political decisions made by the leadership indicating their conviction that the development of heavy industry was a pre-requisite for national development and national strength. In this context it is worth noting that the Chinese government designated the automotive industry as a pillar industry of the national economy in 1994, thereby not only following other major industrial countries but also providing important signals for a specific industrial development as


well as generating specific economic incentives and interests with critical long term implications. In evaluating the significance the environmental issue occupies in the political discourse within China, we are confronted with a rather mixed picture, to say the least. On the one hand, there already existed an early awareness towards the environmental issue going back as far as 1974 when the first administrative organ for environmental management was created. In addition, escalating pollution concerns provided additional reasons for the government to become more concerned from the 1980s onwards. In 1982, the protection of the environment was written into the constitution and environmental concerns became a critical subject at various National Peoples Congresses and figured as a topic in Hu Jintao’s report at the 17th Party Congress, held in October 2007.12 Sustainable development and an environmental-friendly society were mentioned as a significant goal for further development. Equally, the 11th FYP also offers a renewed commitment in addressing pressing environmental issues and in including environmental concerns in China’s development strategy, by emphasizing the development of a ‘resource-efficient and environmentally-friendly society’ and a change towards a ‘more environmental friendly’ energy mix by increasing the contribution of renewable energy sources. In addition, we also observed the publication of a series of government documents, which also focused on the environmental issue. Yet, the actual record of addressing environmental issues, despite some achievements, does not fulfill the expectation generated. Addressing specific environmental issues and the implications of climate change suffers from an underlining structure of Chinese politics: that seldom a single ministry or a single territorial unit is solely in charge of policy formulation and policy implementation. This obviously generates friction and conflicting interests and therefore prolong and extent the policy decision-making and policy delivery process. In recognizing these shortcomings, the

11th FYP for Environmental protection outlines various mechanisms to improve and enhance the capacity of the law enforcement supervision and coordination of environmental planning and oversight. It is further envisaged that “by 2010 the environmental law enforcement teams at provincial, city and county levels will meet the basic requirements for standardized capacity building” (The National Eleventh FYP for Environmental Protection 2006-2010). It is crucial to be aware that timing matters, particularly when selecting an appropriate development strategy, as opportunities do not exist permanently and decisions made at one point in time have strategic implications not only for future developments but equally, for the range of opportunities available. As noted previously, politics takes a central role in the selection and amendment of a specific development strategy. The following section will evaluate the 11th FYP for Environmental Protection and how China’s environmental challenges are addressed in more detail.

THE NATIONAL ELEVENTH FIVEYEAR-PLAN FOR ENVIRONMENTAL PROTECTION (2006-2010) The increasing prominence of the environmental issue reflects various political agendas, documents and statements. One prominent example is the 11th FYP for Environmental Protection by identifying various strategies for enhancing environmental protection. When analyzing the 11th FYP, we can identify both, general statements and the setting of specific targets to be reaching in 2010. On a rather more fundamental level, the 11th FYP emphasizes, that the key to address the environment issue is to achieve a critical transformation towards an equal emphasis of both environmental protection and economic growth, thereby overcoming a solely economic growth focus (The National Eleventh FYP for Environmental Protection 2006-2010).

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To implement such an ambitions change, various key areas and tasks are identified. The most prominent issue is emission control, especially the reduction of urban air pollution. To achieve this goal, the re-location of major urban air polluters will be accelerated, in addition of increasing the quantity of renewable and clean energy in the urban energy mix. Besides, there is also a specific focus on the issue of energy efficiency and on energy saving (The National Eleventh FYP for Environmental Protection 2006-2010). Among the more specific targets to be reached by 2010 are: 10% reduction of SO2 emissions by focusing on the construction of desulphurization facilities of thermal power plants, to halt the increase of acid rain; re-cycling of up to 60% of all industrial solid waste; as well as the above mentioned enhancement of the management capacities of environmental law enforcement teams at various territorial levels (The National Eleventh FYP for Environmental Protection 2006-2010). The Chinese leadership also emphasizes that technological innovations play an important role in addressing the environmental issue. Consequently, promoting environmentally related scientific research and development in addition to promoting the growth of the environmental protection industry represents further critical aspects in addressing the environmental issue (The National Eleventh FYP for Environmental Protection 2006-2010). In addition, as highlighted by Xiaomei Tan and Zhao Gang, China’s ‘Medium-to-Long-Term Science and Technology National Plan’ announced in 2006 also gives priority to the development of technologies related to energy, water resources and environmental protection, as does the National 11th Five-Year Development Plan of Science and Technology, by identifying four energy and environmental related technological priorities, among them: hydrogen and fuel cell, energy efficiency, clean coal and renewable energy (Xiaomei Tan and Zhao Gang, 2009). The 11th FYP on Environmental Protection also indicates a strong commitment for the development of renewable energy resources.

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Regarding the potential of renewable-energy and the related technologies, Cook and Boes emphasize that renewable-energy resources could not only soon meet the world’s energy demand, but as renewable-energy resources are available around the globe, this would also reduce the geopolitical implications of energy security (Cook and Boes, 2005, pp. 127-144). It is worth noting that, adapting and fostering the development of renewable energy resources represents as much a politicaleconomic issue as it presents a technological challenge. As highlighted by Rock, a cleaner production process requires a specific production and technological know-how or a specific level of technical experience which may not always be available to developing countries, or lesser developed countries (Rock, 2002, pp.164-5). This can also limit the ability of adapting a more environmental friendly economic development strategy. Nonetheless, as emphasized by Cook and Boes, renewable energy resources are particularly successful in offsetting greenhouse gas emissions, albeit the specific level of offsetting depends primarily on the type of energy production they replace (Cook and Boes, 2005, p.142). Hence, replacing China’s overwhelmingly coal based energy production, partially or entirely with renewable energy resources, would certainly have a fundamental impact in the reduction of greenhouse gas emissions with positive implications not only for the domestic situation in China but for climate change as well. Albeit these are encouraging signs, we may be rather cautious when overly anticipating future research results, as there is no guarantee that new discoveries will be achieved. However, as Cook and Boes emphasize, there can be serious gains made in both new developments as well as in increasing the economic viability of an existing technology. They note for example, that advances made in photovoltaic technology over the last twenty years made the equivalent technology of the 1980s appear limited and primitive. In addition, improved manufacturing technologies were also instrumental in reducing the costs as-


sociated with today’s photovoltaic technology and consequently increased its competitiveness (Cook and Boes, 2005, p. 136, 139). As indicated in the 2007 Global Status Report on Renewable and its 2009 updated version, the investment in renewable energy capacity, manufacturing plants, and research and development continues to increase dramatically, reaching a fourfold annual investment as compared to 2004 in 2008 (Renewable Global Status Report 2007, 2008, p. 6). If these trends continue, then it is rather likely that the manufacturing cost will decline further, and thereby making these technologies more attractive, as well as increasing the dynamic of replacing traditional and more environmentally damaging energy production. The accelerating replacement of pollution sources of energy generation with sustainable sources would also lessen the negative impact consumption has on the environment. Although the above-mentioned statements and targets providing indications that the Chinese leadership is increasingly serious in addressing the implications of environmental degeneration, we still should be cautions, as the example of the 10th FYP on Environmental Degeneration clearly demonstrates that various critical targets, as mentioned before, were not achieved. Nevertheless, despite this rather weak record, it should not lead to a premature conclusion that the measurements and targets set in the 11th FYP are not achievable either. As many specific strategies in the 11th FYP on Environment Protection are set to reach their target in 2010, hence 2010 will be a critical year for assessing the extent and success or failure in China’s environmental strategy as outlined in the 11th FYP. The security nexus represents another crucial dimension of environmental degeneration and climate change. This issue can be of considerable complexity by connecting domestic and international politics in addition to the previously mentioned underlining scientific issue. Energy security and issues of cross border pollution provide examples of the challenges faced.

THE SECURITY DIMENSION When speaking of environmental security13 it is crucial to recognize its close link with the social, political and economic related implications of environmental degeneration for humankind, reminding us that the ‘human security’ dimension provides the ultimate concern of environmental degeneration. It is equally crucial to remember that environmental issues are neither bound nor constrained by national borders, nor are the regulation costs readily understood at the national level, as they can vary between the local, regional, national or international level for a single environmental issue. Cross-border pollution issues, where the source of the pollution originates in one country but lead to devastating environmental implications in another country, as well as climate change representing critical issues of international environmental concerns. The international dimension of the environmental issue also highlights the potential fundamental implications specific environmental issue can carry for interstate relationships. Yet, the potential impact specific environmental issue can have varies to a considerable extent and can lead to both co-operation and conflict. On the one hand, co-operation in environmental issues may lead to co-operation in other areas as well. However, the opposite can occur, as conflict over environmental issues may undermine the collaboration on other issues. Yet, while the previously mentioned characteristics of the environmental issue has brought state power and state sovereignty into question, responding to cross-border pollution issues and global environmental challenges still requires state authority for addressing such challenges. Consequently, the administrative, financial, legal and regulatory power of the state is still of crucial importance when addressing environmental issues. However, the urgency and concreteness of a specific environmental problem has fundamental consequences for the securitisatization process14 and the provision of critical political and economic resources for addressing the challenge

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a specific environmental issue poses. Another crucial implication for the speed and success of the securitization process of a specific environmental issue is related to the geographical dimension of a specific environmental issue. It is at the local and regional level that the awareness towards the human related costs will be most sensitive, and consequently, by adding pressure, facilitating a successful securitization process. Yet, not every securitization process is successful and the earlier mentioned complexity of specific environmental issues as well as political and economic considerations may work against a successful securitization of a specific environmental issue despite the negative impacts it generates. As for the domestic situation China finds itself in, there is a strong indication that the government recognizes the serious significance of environmental degeneration by addressing various pollution issues, which threaten the welfare of a considerable part of its population. However, there are limitations to the central government directives, as many environmental issues are applicable to the local and provincial level, where the political actors may be less inclined to address them for various reasons, including economic considerations, local corruption, and local resistance reflecting the existence of vested interests. In addition, economic considerations at the central government level may also override environmental considerations despite statements made to the contrary as generating and guaranteeing strong economic growth represents an overriding goal for the Chinese government. Overall, economic success represents a crucial source of its political legitimacy. The energy issue represents another, but intrinsically related example when identifying a potential goal conflict between environmental protection and in providing enough energy for its economic development strategy, as coal provides a cheap and available source for addressing China’s energy demand. However, the use of coal for producing energy also generates some of the worst cases of environmental pollution in China. Reducing the

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use of coal for energy production would dramatically increase the environmental quality in many parts of China, though the government recognizes this, it is unlikely it will reduce the amount of coal for producing energy, as such a step would seriously undermine the government’s ability to provide adequate energy for its growth strategy and consequently have a negative impact on the critical issue of energy security. With regard to the domestic-international interface of environmental issues in northeast Asia, it is accepted that both acid rain and Kosa, originate in parts of northern China,15 and that both have negative environmental implications not only on China itself, but on other Northeast Asian countries as well. Both subjects provide good examples of cross-border pollution issues and the complexity involved in addressing their impact on a variety of countries. Albeit there are signs of increasing bilateral and multilateral cooperation regarding trans-boundary environmental issues in Northeast Asia, there is no uniformity in the degree of cooperation of various environmental issues. As pointed out by Brettel, in the case of acid deposits the cooperation developed is more comprehensively, illustrated by the establishment of the Acid Deposition Monitoring network in East Asia (ADMNEA) in 1992, and its subsequent evolvement into the East Asian Acid Deposit Monitoring Network (EANET) in 2001. This development forms the core of an emerging regional acid rain regime, covering both east and Southeast Asia.16 EANET recognised that further development was required to perform its role as a regional organisation and at the Fifth Session of its Intergovernmental Meeting in November 2003 it took the decision to prepare a medium term plan: ‘Strategy on EANET Development (2006-2010).’ In it, a number of goals and objectives are identified, among them are the necessity to improve the quality of the data and data management of acid deposition monitoring; an extended assessment of the current acid deposition situation in East Asia; focusing on scientific research on the


atmospheric environment and its condition in East Asia; and to increase the public awareness and common understanding social, economic and environmental impacts of atmospheric pollution in East Asia (Strategy on EANET Development 2006-2010, 2006, pp. 1-2). EANET may represent a successful and positive attempt of regional environmental governance in addressing a specific environmental challenge. However, addressing the issue of acid rain successfully will largely depend on further developments within China and China’s ability or inability of substituting its coal based energy generation and at the same time to provide sufficient energy for its booming economy. Acid rain and climate change issues are also closely related to energy security and could lead to tensions in addressing these issues in the future. Yet, the situation regarding the Kosa phenomenon is rather different and though some forms of cooperation are developing (establishing a Yellow Dust Monitoring Network in 2002) they are still in a rather early stage of development (Brettel, 2007, pp. 89-113). Regarding the sources and the spatial distribution of the Kosa phenomena there are three principal areas identified, among them parts of western China (Taklimakan Desert and surrounding areas), northern China as well as desert and semi-desert areas in southern Mongolia. Yet, based on scientific evidence, there are indications that the area in western China only contributes a negligible level to the downwind distribution, which severely affects other parts of China, Korea and Japan. Instead, it seems that the contribution from northern China and from southern parts of Mongolia to the Kosa phenomenon are more significant when evaluating it negative impact on Korea and Japan. In addition, there is evidence that the centre of Kosa is shifting further north (Wang at all, 2008, pp. 547-8). Here again, the scientific issue plays a crucial role in determining the source of and implications of the Kosa phenomenon. Yet, whether these collaborations will lead to a development of an inter-subjective community

among the involved countries is an open question, but if they are able to address their common environmental challenges, they may come to an understanding regarding other issues as well.

CONCLUSION This paper addresses the complexity involved when tackling the issue of environmental degeneration and the impact climate change has on China’s future development and on China’s population. Addressing these challenges requires acknowledging that various fundamental issues underlining the environmental issue. One critical factor is the scientific agenda - the identification of the existing link between a specific environmental issue and its implications for human health. Establishing such a link provides a critical challenge, especially when addressing such complex issues as climate change. Nor is it without a challenge to communicate scientific work to a wider population. In addition, we can also identify an environment-development nexus, as different economic growth and modernization strategies will differ in their impact on the environment. Yet selecting a specific development strategy, either to include or exclude environmental consideration is a conscious and deliberate political decision and takes place within a specific political, economic, historical and social setting. Another critical feature of environmental issues is that they are not bounded by national borders. Cross-border pollution issues are prominent examples, as is the case with climate change. The specific nature of the environmental issue could carry potentially serious consequences, for bilateral and international relations, by instigating a dynamic process which can be measured on a continuum between cooperation and conflict. It may also inherent a potential for spillover effects regarding other bilateral and multilateral relations, again with the potential of impacting on both ends of the co-operation/conflict scale. In the case of China and its relations to East

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Asia we can identify various issues of cross-border environmental concerns, among them acid rain, the Kosa phenomenon and Northeast Asia’s CO2 emissions. However, China also faces fundamental domestic environmental issues as water and air pollution, loss of arable land, water shortage, and various implications of global warming. Critically, many environmental challenges China faces are related to its economic success, the contemporary process of urbanization we can observe in China, as well as the willingness and ability of it emerging middle class to consume. In this context, we may recall that providing economic growth provides a critical and fundamental contribution to political legitimacy. However, economic development must not always take precedence at the expense of the environment and China is still in a position to address its environmental issues by changing its growth oriented development strategy. There are indications that China’s leadership increasingly take the environmental question serious by formulating several critical targets regarding emission and pollution control issues to be reached in 2010. In addition, there are other strong indications that China’s leadership increasingly note the critical significance of environmental issues as various political statements in government White Papers and the inclusion of the environmental issue into the work reports of various National Party Congresses clearly indicating. However, the impacts these political declarations generate are still less visible than one would expect. To what extent China will be able to reach these goals will provide an indication to what degree China will be able to address its environmental issues. Crucially, addressing its environmental challenges provide the ‘challenges of an opportunity’ for the Chinese government. Yet, turning a crisis into an opportunity requires willingness and the capacity to act. The success or failure of addressing China’s environmental issue will indicate the government and the Party willingness and capabilities to manage the environmental challenges China and it population is facing.

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REFERENCES Black, R. (2010, January 19). UN climate body admits mistake on Himalayan glaciers. BBC News. Retrieved from http://news.bbc.co.uk/1/ hi/8468358.stm Brettel, A. (2007). Security, energy, and the environment: The atmospheric link. In Hyun, T., & Kim, S.-H. (Eds.), The environmental dimension of Asian security: Conflict and cooperation over energy, resources, and pollution (pp. 89–113). Washington, DC: United States Institute of Peace. Chinese Government. (2010). Policies and action for addressing climate change. Retrieved from http://www.china.org.cn/ government/ whitepaper/ 2008-10/ 29/ content_16682687.htm Cook, G., & Boes, E. (2005). Renewable-energy technologies. In Pirages, D., & Cousins, K. (Eds.), From resource scarcity to ecological security (pp. 127–144). Cambridge, MA: MIT Press. Hu Jintao’s report to the 17th Party Congress. (2007). Hold high the great banner of socialism with Chinese characteristics and strive for new victories in building a moderately prosperous society in all respects. Retrieved from http:// english.cpc.people.com.cn/ 66102/ 6290205.html KPMG. (2007). Momentum: Driving forces in China’s car market. Retrieved from http://www. kpmg.ch/ docs/ 20071221_Momentum_Driving_ Forces_in_Chinas_ Car_Market.pdf National Bureau of Statistics of China. (2010). Retrieved from http://www.stats.gov.cn/ english/ statisticaldata/ yearlydata REN21. (2008). Renewables 2007 global status report. (Paris: REN21 Secretariat and Washington, DC:Worldwatch Institute). Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH. Retrieved from http://www.ren21.net/ pdf/ RE2007_ Global_Status_Report.pdf


REN21. (2009). Renewables global status report: 2009 update (Paris: REN21 Secretariat). Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH. Retrieved from http://www.ren21. net/ pdf/RE_GSR_2009_Update.pdf Rock, M. (2002). Pollution control in East Asia: Lessons from newly industrializing economies. Washington, DC: Resources for the Future. Ruth, M. (2005). Future socioeconomic and political challenges of global climate change. In Pirages, D., & Cousins, K. (Eds.), From resource scarcity to ecological security (pp. 145–164). Cambridge, MA: MIT Press. Selected Words of Deng Xiaoping. (1982-1992). Excerpts from talks given in Wuchang, Shenzhen, Zhuhai and Shanghai. Retrieved from http:// english.peopledaily.com.cn/ dengxp/ vol3/ text/ d1200.html Strategy on EANET Development. (2006-2010). The Eighth Session of the Intergovernmental Meeting on Acid Deposition Monitoring network in East Asia 20-30 November, Hanoi, Vietnam. Retrieved from http://www.eanet.cc/ product/ strategy/ strategy.pdf

Xiaomei, T., & Zhao, G. (2006). A review on East Asian dust storm climate, modelling and monitoring. Global and Planetary Change, 52, 1–22. doi:10.1016/j.gloplacha.2006.02.011

ENDNOTES 1

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The National Eleventh FYP for Environmental Protection. (2006-2010). Retrieved from http:// english.mep.gov.cn/ Plans_Reports/ 11th_five_ year_plan/ 200803/ t20080305_119001.htm United Nations. (2010). Data: A world of information. Retrieved from http://data.un.org Wang, Y. Q., Zhang, X. L., Gong, S. L., Zhou, C. H., Hu, Q. H. III, & Liu, T. (2008). Surface observation of sand and dust storms in East Asia and its application in CUACE/Dust. Atmospheric Chemistry and Physics, 8, 545–553. doi:10.5194/ acp-8-545-2008 Wyn, J., & Li, R. (1999). Security, strategy, and critical theory. Boulder, CO: Lynne Rienner.

An earlier version of the paper was presented at the CEA (Europe/UK) Chinese Conference ‘China and the Changing Landscape of World Economy – Confucian- ism and Financial Crisis Management, People’s University of China, Beijing, September 26th 2009. For further discussion and evaluation on these issues see among others: Paul G. Harries (ed) Global Warming and East Asia (2003); Joseph F. C. DiMento and Pamela Doughman (eds) Climate Change: What it means for us, our children, and our Grandchildren (2007) For example, small island-countries in the Pacific or the Indian Ocean already feel the pressure generated by sea level rise. Albeit a tsunami is not an environmental issue in the context of environmental degeneration applied in this paper. However, who does not remember the picture of destruction that the Boxing Day Tsunami of 26 December 2004 generated and the consequent devastation within communities and of large parts of coastlines in Indo- nesia, Thailand and Sri Lanka? Since then, for many people around the globe, the meaning and the potential destructive power a tsunami can have are synonymous with that event. Many people still remember the incident in the Jilin Petrochemical Corporation in November 2005 which poisoned the drinking water of millions of people in north-east China that also lead to one of the worst cases of trans-border pollution and industrial water

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pollution that also impacted on the water quality of the Russian territory. For example: China’s Energy Conditions and Policies; Environmental Protection in China; China’s Policies and Action for addressing Climate change; Environmental Protection in China (1996-2005) See: BBC news 19th January 2010: ‘UN climate body admits ‘mistake’ on Himalayan glaciers’, http://news.bbc.co.uk/1/ hi/8468358.stm See National Bureau of Statistics of China, http://www.stats.gov.cn/english/statisticaldata/yearlydata See UNdata a world of information, http:// data.un.org Highlighting the critical relevance of economic development and performance in providing the CCP with political legitimacy Deng Xiaoping himself acknowledged in the spring of 1992: “Anyone who attempted to change the line, principles and policies adopted since the Third Plenary Session of the Eleventh Central Committee would not be countenanced by the people, he would be toppled.” Adding that “[h]ad it not been for the achievements of the reform and the open policy, we could not have weathered June 4th.” (Selected Words of Deng Xiaoping, Volume III 1982-1992). It is also worth recognizing that in 2007 China’s ratio of passenger per car was about 70 people per car, as compared to almost one person per car in the USA (KPMG, Momentum: Driving Forces in China’s Car Market, 2007). Nonetheless, it seems almost inevitable that China’s contemporary high ratio will decline, and the growth of both sales and production of China’s passenger car market in 2007, reaching over 20 percent, clearly indicate that such a scenario is most likely (KPMG, Momentum: Driving Forces in China’s Car Market, 2007).

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The environmental issue was addressed in Hu Jintao’s report to the 17th Party Congress, on October 15th 2007. The environmental issue was mostly addressed in the context of resource scarcity and its potential negative impact on further developments of the environment and the negative impact on the quality of life as a result of the economic development. Hu Jintao further acknowledged that China’s economic growth is realized at costs of resources and the environment. This critical re-definition of security happened in the background of the dramatic shift in global politics: the end of the cold War period. Consequently, the fundamental debate, concerning the interpretation of security in the aftermath of the Cold War centred on the following issues: Deepening of security, overcoming the abstraction of military issues from their broader contexts; Broadening of security, moving away from a narrowly military focus; Extending security, by shifting away the state focus of it and to incorporate other levels of analysis as society, ethnonational or religious identities, or individuals for example; Security as emancipation, freeing of people - as individuals and groups - from constraints. See. Jones Wyn and Richard Li, Security, strategy, and critical theory, (Boulder Colorado, Lynne Rienner, 1999), p. 102-118 By presenting an issue as a security concern the actor (politician, bureaucrat, pressure groups) not only demands extraordinarily resources in addressing a specific issue, but also in a different mode when dealing with this issue, this is a fundamental political process. Basically, a securitisation process normally involves a referent object, a securitizing actor, and a functional actor. This also remind us, as mentioned earlier, that security is not something objective which just needs to be uncovered, thereby highlighting its socially constructed character.


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The securitizetion approach within security studies is also known as the Copenhagen School, represented by Barry Buzan, Ole Waever and Jaap de Wilde. In the case of Kosa it is also recognised that part of it originates in various locations within Mongolia.

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Among the member states are: Japan, Russia, Mongolia, China, Republic of Korea, Viet Nam, Philippines, Cambodia, Lao P.D.R., Myanmar, Thailand, Malaysia, and Indonesia.

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Chapter 26

Study on Low-Carbon Economy Model and Method of Chinese Tourism Industry Zhang Mu Jinan University, China

Tang Lei Jinan University, China

Luo Jing Jinan University, China

Feng Xiao-na Jinan University, China

Zhang Xiaohong Jinan University, China

Chen Shan Jinan University, China

ABSTRACT Recent years saw the global wave of new low-carbon economy, which is a new strategic measure to cope with global warming, and it has gained lots of concerns from many governments. As the representatives of developing countries, China is responsible for “common but distinguishing duty for global climate change.” Many policies have been made to develop low-carbon economy with the hope to advocate and innovate low-carbon economy in some industries and cities during these years. Therefore, it is a theoretical and innovative project to find out a low-carbon economical model for various industries and carry out the experiments of low-carbon economy in some cities. Hence, guided by low-carbon economy theory, choosing booming Chinese tourism industry as the object, this chapter tries to construct an operation framework system of low-carbon tourism development from the advantage of low-carbon tourism to the proposal of low-carbon tourism definition so as to conclude an execution scheme of “six elements” of low-carbon tourism with selecting OCT East (Chinese national ecotourism demonstration district) and Mt. Danxia (World Geo-park) as demonstration districts to discuss about models and methods of low-carbon economy in tourism. DOI: 10.4018/978-1-60960-531-5.ch026


Study on Low-Carbon Economy Model and Method of Chinese Tourism Industry

OUTLINE Since United nation framework convention on Climate change in 1992 and Tokyo Protocol in 1997 started systematic discussion of low-carbon economy, British President Mr. Tony Blair initially proposed the conception of “Low-carbon economy” in resource white book “Our energy future: establishment of low-carbon economy” in 2003. Developing low-carbon economy has caught increasing attention all over the world (Jia D. C., 2009). It follows a series of new words and names such as low-carbon, carbon footprint, low-carbon economy, low-carbon technology, low-carbon development, low-carbon economic demonstration district, carbon productivity, carbon trade market, low-carbon life style, low-carbon society, low-carbon city, low-carbon world to create a new low-carbon era globally. As a modern service sector with the characteristics of low consumption, little pollution and big volume of employment demand, tourism has the potential to be low-carbon sector initially (Bao J. Q. et al., 2008). In May of 2009, in International commercial summit of climate change hold in Copenhagen, World Economy forum submitted the report of Forward to low-carbon tourism which proposed the improvement of low-carbon sustainability of tourism by all governments, industry’s stakeholders and consumers to achieve continuous growth of tourism and national economic sustainable development. It is also a part of long-term scheme for handling with climate change by tourism branches. There are a lot of questions such as what is low-carbon tourism? How to realize effective combination of tourism with low-carbon economy? Therefore, this chapter tries to make preliminary exploitation and study on the relevant issues of “low-carbon economy and tourism”. It will not only offer theory guidance on sustainable development of tourism, and it is also full of pioneering demonstration and example significance on practical application development of notion of green low-carbonization in tourism.

The article has accomplished following tasks according to present tendency of low-carbon development and characteristics of tourism. •

•

•

It introduces overview of low-carbon economy including the generation of lowcarbon economy, conception explanation, significance of the Times on development of low-carbon economy and effective channel to realize it. Macroscopic understanding on relevant theory of low-carbon economy can play a theoretical guidance role on effective explanation and realization of low-carbon economic notion. It proposes the necessity, possibility and strengths of low-carbon tourism economy development in tourism according to its development situation and industrial advantage. It also emphasizes pioneering role and example effect of low-carbon economy development in tourism. Hence it establishes a solid industrial foundation for execution of low-carbon economy, and indicate future strategic path for low-carbon tourism development. It tries to propose an operation framework system based on the understanding of industrial advantage of tourism to develop low-carbon economy with combining industrial relevance, industrial structure, and development model of tourism. This framework includes four systems such as power system, supportive safeguard system, participating main objects system and realized target system. They will play important roles on efficient guidance and standardization of low-carbon tourism development. What’s more, It suggests executive scheme on low-carbon tourism development based on six elements in tourism. Finally, Focusing on the Guangdong’s strategic target of “Top province of low-carbon economy”, this article selects two representative ecotourism areas to be objects,

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Shenzhen east OCT and Mt. Danxia of Guangdong province to study their series of ecology environmental-friendly designs and specific strategies related with lowcarbon conception to prove workability of low-carbon tourism development in order to set a demonstrative example of carrying out low-carbon tourism in the country.

INTRODUCTION The theme of World Environment Day in 2007 is melting iceberg, worrying consequence; and Kick the habit! Towards a low carbon economy in 2008. On the 5th of June, 2009, the ceremony of World Environment Day was hold in Mexico with the theme of Your Planet Needs You-Unite to Combat Climate Change. Three themes in World Environment Day are related to greenhouse gas emission and global warming, which indicates global warming has become the most severe environmental issue to human being. Since we entered industry age in 1750, greenhouse gas in the air has increased sharply, and carbon dioxide volume in atmosphere has rose by 33% compared with past 200 years (Ding Y. H., 2007). Intergovernmental Panel on Climate Change(IPCC) issued the profile of the last part of the 4th climate change evaluation report in Valencia of Spain which conveys strong warning for the damage from global warming. The report said, in this century, global temperature may increase to 1.1 to 6.4 centigrade; the surface of ocean will rise to 18-59cm. If increase of temperature is over 1.5 centigrade, 20%-30% of plant and animal species in the world will face the danger of extinction. If it is more than 3.5 centigrade, 40%-70% of species will disappear. Then there will be series of disasters such as more tropical storms, increasing floods along coastal areas results from the rise of sea level, reduction of crops, spread of disease etc. And the developing countries have to face more severe situations for the problem because

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of population and economy problems. As the representative of developing countries, China has to handle double tests from economic development and environment protection. On 8th of September,2007, China president Mr. Hu Jintao attended Asia Pacific Economic Cooperation(APEC) 15th leaders meeting, he solemnly proposed four recommendations to definitely advocate to “ develop low-carbon economy” with the attitude of being responsible for future, for the happiness of Chinese, people in Asia and all over the world. In the same month, the minister of National Ministry of scientific technology Mr. Wan Gang appealed to develop low-carbon economy in annual conference of China Scientific association of 2007. In National People’s Congress of 2008, delegates of CPPCC proposed “low carbon” in government bill for discussion. Therefore, low-carbon economy has got attention from state and government, and its development directly concerns the future of China. However, Chinese coal-oriented energy structure is hardly to make obvious changes in middle or long term (Zhang K. M. et al., 2008). Development and application of low-carbon economy need a longer cycle because of limitation of capital and technology. But as a governmentdominant sector, tourism is macro-controlled by government, the notion of low-carbon economy is easier to be accepted and realized in tourism than in other industries. According to the prediction from world tourism organization, China will be the No.1 tourism reception country and No.4th tourist country. There is an increasing impact on region by tourism consumption, which causes deeper influence on resources. Therefore, developing low-carbon economy in tourism will not only reduce the loss of physical materials, the pollution to environment, its appeal of green consumption, it will also influence people by tourists which will bring benefits the propaganda and promotion of low-carbon behavior in the whole society. At the same time, because of high industry relevance of tourism, its positive development will promote health growth of other industries.


Nowadays, the combination of low-carbon economy and tourism has become a new focus for tourism concern and discussion. Some scholars have started preliminary study on it. For example, Hu A. G.(2007) thinks during the process of transformation from high-carbon economy to low-carbon economy, low-carbon service market includes low-carbon tourism service, low-carbon catering etc. Kang R., Yang H. Z., Wang F.(2009) proposed to depend on following low-carbon commodity and service with developing Chong ming’s ecological tourism such as ecological agriculture, ecological agricultural products processing industry, green transportation and distribution industry, development and production of new energy, green catering, green accommodation, green hotel appliance, tourism souvenir manufacture etc. Liu X.(2009) regards low-carbon tourism as green tourism based on low consumption and pollution with the notion of low-carbon economy; Li D. S.(2009), Wei P. C.(2009) have realized era innovation and economic growth character brought by low-carbon economy, they think low-carbon tourism is the tendency of tourism development which involves three aspects of tourism such as eating, accommodation and transportation, and encouragement of all tourists’ involvement will promote a low-carbon tourism time. Though these studies lack practical test, it provides guidance and reference for tourism further low-carbon tourism development. This article tries to combined theory and practice to have a comprehensive exploitation on low-carbon economy application in tourism based on these research outcomes.

CONNOTATION OF LOWCARBON ECONOMY Generation of low-carbon economy is to cope with climate change and resource demand. It is an economic model based on low consumption, pollution and emission with the aim of reducing

the dependence of fossil fuels to cut the emission of green-house gas.

Origination and Definition Connotation of LowCarbon Economy With continuous growth of global population, economy scale and mass application of fuel such as coal, petrol and gas after industry revolution, besides the harm from smoke, photochemical smog and acid rain, Arrhenius’ prediction of global weather change resulted from increase of CO2density in the air in 1896 has proved to be the truth (Zhang K. M., 2005). Global warming brings severe challenge for human survival and development. However, America refused to ratify Kyoto Protocol with the excuse of “developing countries should also take responsibility of curbing greenhouse-gas emissions”. In order to break the deadlock in negotiation, Britain initially proposed to develop low-carbon economy, and its overall target in Resource White Paper was to cut 60% of 1990’s CO2emission by 2050 to essentially transfer Britain to be a low-carbon country. The conception of low-carbon economy is from the demand of weather change and resource safety. However, its connotation is expanding with the growing serious problem. Nowadays, low-carbon economy has become a big tendency of world economy development which is regarded as the only way to tackle climate change and sustainable development. As a frontier economic idea with extensive sociality, low-carbon economy has no conventional definition, but it involves wide industry and management fields. It is an economic development model, energy consumption way and lifestyle to realize high efficiency and profit based on low consumption, emission and pollution. And it achieves another human progress from agriculture to industry and then to ecology culture. Its essence is the issue of high utility of energy, exploitation of clean energy, pursuit of

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green GDP with the key of innovation on energy technology and emission reduction technology, industrial structure and regulation innovation, fundamental transformation of human survival and development notion (Fang H., 2009).

such as refusing one-off product, walking instead of using car, buying energy-saving products etc.

The Era Significance of Developing Low-Carbon Economy

The development of low-carbon economy not only needs the efforts from government and enterprise to make policy, construct system, improve management in macro-coordination level, it also requires to improve people’s awareness, encourage enterprise participation to develop new energy, move on international cooperation to promote development of low-carbon economy comprehensively. Recent years, many countries’ exploitation can be concluded in two systems for main realization approaches of low-carbon economy: hardware and software system. The former includes three elements such as energy saving, emission reduction, recycled clean energy, and the latter refers to five elements such as policy, regulation, management, index and ideology (See Figure 1).

1. The Demand of realizing human sustainable development

Everybody has to admit that environment pollution and energy shortage has threatened human’s survival and development. Expansion of population and modernization of lifestyle need more energy consumption. While with limited energy storage and environment self-purification capacity, if people want to realize sustainable development, they have to replan the utility of energy to choose the green path with low consumption and high efficiency. 2. Demand of state development It is the direction of energy development for exploitation and utility of clean energy. Owing to the unbalanced development of world economy, developed countries seize the advantages of clean energy’s capital and new technology. On the way of industrialization, developing countries have the increasing demand for energy, while there is more pressure for their emission of carbon dioxide. China, as the representative of developing countries, thinks it’s urgent to reduce energy demand and energy carbon intensity, improve energy utility and develop clean energy. 3. Change of individual life and consumption As popularity of low-carbon notion in people’s life, energy-saving lifestyle will be advocated

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Ways to Realize LowCarbon Economy

STUDY ON LOW-CARBON FRAMEWORK AND DEVELOPMENT MODEL IN TOURISM Tourism has the Potential to be Low-Carbon Industry Initially Low-carbon economy is the green economy based on low consumption and pollution with the target of transferring the whole society to the model of high efficiency, low consumption and carbon emission with constructing economic development system including low-carbon system, technology and industry system. This target not only requires technology reform and industry transformation in high energy consumption and emission, also needs to increase the proportion of the third industry which is acknowledged as low consumption to develop low-carbon industry


Figure 1. Low-carbon economic system

in the whole industry structure. Take China for instance, we has a poor three-industry structure as a fast modernized and urbanized developing country with coal as main energy consumption. Though the third industry develops quickly, its total increase number is always lingering in 30%40% of GDP which is obviously lower than 70% in advanced countries and 50% in most developing countries (Zou D. T., 2008).Therefore, in the path of low-carbon economy, China needs firstly to plan three-industry structure reasonably. When expanding the proportion of the third industry, people should adjust inner structure of industry, improve energy-saving and emission reduction and advocate ecological recycle economy. Referring to expansion of scale of the third industry and high speed of its development, it is a tendency to carry out low-carbon economy in the third industry. Because economic development model of the third industry is lower in consumption, less in pollution and easy to transform, it bears the advantage and possibility of transferring to low carbonization, it

can also plays the pioneer role the test low-carbon economy. Hence, low-carbon economy needs the support from the third industry. Tourism is prominent in the third industry, and it is regarded as one of the backbones in many countries with largest industry scale and driving development vigor with characteristics of high development speed, broad involved industry, wide influenced region and large number of participants. Tourism directly involves tourism scenery spot, hotel, travel agent, tourism transportation, entertainment etc, and indirectly relate to material suppliers such as agriculture, industry and construction fields. Now the gross output of tourism is more than 10% of global domestic gross production, and it will speed up in 8%-10% annually during 20 years, the number of outbound visitors will reach 1.1 billion in 2010, and 1.6 billion in 2020. With expansion of tourism scale, tourism effect is increasing. But the damage and threats from this so-called “Green industry” to environment and resource has not only affected

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sustainable and healthy development of tourism itself, also concerned with global environment change. The report from World Tourism Organization, UNEP, and WMO indicates that tourism is one of sources of green house gas. Its emission of the whole sector is 4%-6% of the global total amount. Among them, transportation and hotel share the largest part of the emission. It is predicted that the emission of green house gas in tourism may increase 1.5 times without efficient strategy. Hence, it is a inevitable tendency to develop low-carbon economy in tourism. Energy consumption of Chinese three industries shows the proportion of energy consumption is ranked as the second industry, the third industry, the first industry. And it witnesses obvious up tendency for the third industry which focuses on transportation, and it gradually exceeds the second industry (Zhang L. F., 2008). UNEP issued two reports on World Climate day of 2008, they are Kick the Habit: The UN Guide to Climate Neutrality and Climate Change Adaptation and Mitigation in the Tourism. In May of 2009, World Economy forum in Climate Change World Trade Summit in Copenhagen of Denmark submitted the report Forward to Low-carbon tourism. It advocated to reduce emission of green house gas in all sectors such as transportation and accommodation, and it also discussed market mechanism and innovative financial methods during the transformation to green economy. In February 2009, Criteria of Global Sustainable tourism was carried out officially in Barcelona which requires developing tourism needs to avoid having negative effect on geographic environment, local organization and cultural heritage in travel destination to realize tourism sustainable development. The publication of mentioned reports and criteria indicates it contains potential necessity to develop low-carbon economy in tourism, and some key trade organizations led by world tourism organization have adopt relative strategies to guide and regularize low-carbon movement of tourism. The necessity presents in following aspects.

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Tourism involves a lot of fields with huge energy consumption and emission. As tourism relates with foods and beverages, accommodation, transportation, travel, shopping, entertainment and recreation. For a long time, restaurant, transportation, scenic spot have discharged a large amount of CO2 which have great impact on global climate and environment. As a high consumption location, hotel has to consume a plenty of resource and energy in construction and operation; at the same time, it will discharge huge amount of air pollutants to be city pollution source of carbon emission. For example, a three-star hotel in middle size will consume the energy of 1400 tons of coal and at least exhaust 4200 tons of CO2, 70 tons of dust, and 28 tons of sulfur dioxide per year, while a big hotel with floor area of 80000-100000 square meters will consume 130-180 thousand tons of norm-coal. Tourism needs the transportation such as motor vehicles, steamer, train, bus, plan etc, each of which will have somewhat pollution to the air. Audit Office of America published a report to prove that CO2 emission from car and plane is the main factor for air pollution and global warming. Jet aircraft with passengers will exhaust 23 kilogram CO2 every 100 kilometers, car will discharge about 18 kilogram CO2 every 100 kilometers, while train’s emission of CO2 is less than 5 kilograms every 100 kilometers (Wang J., 2009). Development of low-carbon economy in tourism is an inevitable path to cope with global climate change to transfer from extensive to intensive operation so as to realize sustainable development of tourism. As people know, tourism highly relies on resource and is sensitive to climate environment. The change of climate environment will have direct impact on time and


•

space of tour activity to influence the development of whole sector. According to report of world tourism organization, climate change may shock tourism around northern Europe, Mediterranean sea and Caribbean area. What’s more, least advanced countries and coastal, mountainous area and those regions easy to be affected by natural factors in Small Island countries may confront with more severe situation, and global warming may change visitor’s choice about tour destination. Moreover, in specific location, developing construction of scenic spot, tour transportation facilities, hotel catering facilities and visitors activity will damage primary ecological environment to affect tourism resource tremendously. In order to achieve sustainable development of tourism, it has to handle with climate change actively to initiate self rescue to improve operating development model. The origination of public low-carbon awareness and population of low-carbon life requires tourism’s guidance and motivation. One of important meanings of “low-carbon economy” not only urges manufacture to quickly give up poor production capacity with high consumption and pollution, also refer to guide people reflect those bad habits with wasting energy and increasing emission and pollution so that huge potential of energy saving and emission reduction in consumption and life can be fully cultivated (Zhang Y. P., 2009). Low-carbon economy eventually depends on low-carbon lifestyle to foster public consciousness of low-carbon life to consciously accept simple and concise lifestyle. Since recreation and tourism has become an important part of life, there are a lot of people from broad regions participating in tourism activity. Tourism enjoys absolute advantage of spreading and guid-

ing low-carbon life to be the experimental field for people experiencing low-carbon life around them. So this unconscious guidance will gradually root low-carbon awareness into people’s mind and life. At present, there appears some low-carbon experience activities in tourism, for example, global online travel company Travelocity and Expedia launched package service named “carbon neutralization”. Clients pay some dollars more, enterprise and organization will offset CO2 produced by their travel activity with planting trees and other environmental friendly projects; Those transportation with less or no pollution such as environmental friendly sightseeing vehicles, electromobiles, animal-drawn vehicles, rickshaw etc will be used in scenic spot to protect ecological environment; what’s more, Ctrip travel network introduced the scheme of “ carbon compensation”, that is to plant corresponding number of trees to have “carbon compensation” according to CO2 emission during passengers’ flight. As an important part of the third industry, tourism bears more advantage and possibility to develop low-carbon economy compared with other third industries. It is predictable that tourism can be the pioneer of low-carbon economy movement in the third industry even all over the world which is mainly decided by social environment and characteristics of tourism. First, Tourism develops powerfully, and there is increasing demand for market low-carbonization, so tourism is able to take the responsibility to play the leading role for low-carbon economy. As mentioned above, tourism belongs to the third industry, and it is the sector needs to be greatly developed. Proportion of increase value of the third industry in developed courtiers in GDP has exceed that of the second industry, it actually is an assessment index of a country’s economic development situation. What’s more, energy consumption and pollutant emission of the third industry is obvious lower than the second industry;

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it indicates generous support and guide from all countries in the world, especially the developed countries. As a sunrise industry, tourism has the ability and responsibility to stand at the frontier of low-carbon economy. Meanwhile, low-carbon economy has swept the world since its appearance at the end of last century. Because it is more than a new slogan of human’s protection to the earth, it is actually the terminal aim for people’s pursuit for healthy life to achieve sustainable development in post-industrialization age. All these push some people (most of them are from western countries) to chase for low-carbon life, to respond its call to reduce and neutralize their carbon emission in life and journey. And this market demand conforms to world development principle. Tourism is able to actively develop market and promote its expansion. Therefore, tourism possesses certain condition to transfer to low-carbon economy under the environment of world economic structure adjustment and tourism market demand. Second, tourism industry’s characteristic makes its acceptance and execution on notion of low-carbon economy more accessible and adaptable, and it can enter low-carbonized procedure initially (Li T. Y., 2006). Tourism is firstly a labor-intensive service sector, so its product is the service mainly presented by labor services. Though overall tourism products contain some physical elements, in terms of a complete tour experience, what tourists get from it is satisfaction of psychological and spiritual needs which is a “memory” to tour experience. Tourism involves a lot of fields; however, its industry technology is not as strict as sectors like resource, chemical industry, metallurgy that needs technology innovation and reform to reduce emission in production process. While main fields of lowcarbonized tourism is presented in scenic spot exploitive construction and three aspects such as foods and beverages, accommodation and travel which indicates to change extensive construction operation method to transfer to ecological recycle and intensive economy. Meanwhile, it will enhance

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tourists’ ideological quality to cut unnecessary energy consumption. This characteristic of tourism is the root to comply with the tendency from extensive to intensive economy to meet the need of low-carbon economy. Secondly, the target of low-carbon economy shares the common ground with the logics of tourism sustainable development which build foundation for tourism accepting low-carbon economic thought and joining in low-carbon economic movement. Because of the resource and environmental dependence of tourism, the issues on the coordination between tourism development and environment have been discussed for about 20 years. Sustainable development is actively called for and propagandized by government, scholars and medium. And the criteria and target of tourism sustainable development has been approved by most of people. Social, environmental, cultural impact and counterstrategies of tourism development has got long-term attention and study from scholars and experts. Thirdly, with strong driving power, tourism can connect with various traditional and independent sectors that can meet tourists’ satisfaction by offering service, and its booming growth will motivate other sectors’ development. Similarly, Carrying out low-carbon economic movement in tourism will produce imperceptible influence on other sectors to gradually change traditional structure of some sectors to push their low-carbonization to adapt to the need of travel activity and demand change of tourists. Though tourism is able and possible to execute low-carbonization, with wide and many involved fields, the construction of low-carbon economy can not be done in a short time. It needs great efforts and exploitation of all relevant sectors in a long economic developing course to seek suitable low-carbonized operation frame, economic model and index system.


Proposal of Low-Carbon Economy As the name of low-carbon economy developing in tourism, “low-carbon tourism” is originated from “low-carbon economy”. Low-carbon economy is a tourism form which discharges low CO2 emission, that is a kind of tourism form to calculate and control emission of CO2 in tour activities to decrease its emission and try to compensate released carbon with some actions. So “low-carbon tourism” can be called as an environmental friendly tourism in deeper level and it is an important part in tourism sustainable development as well. Nowadays, there is no definite and unified conception for low-carbon tourism, but it is a low consumption and emission travel form with the target of ecology and environment protection. And it is a specific presenting form and application way for tourism sustainable development similar with ecological tourism. In fact, the idea of sustainable tourism development, ecology tourism, low-carbon tourism is submitted for handling

with the impact from travel activity, preservation of natural and social environment, improvement of sector’s health and sustainable development. They contain difference and similarity in conception and connotation. (See Table 1) Sustainable tourism development is a development notion benefit for tourism long-term healthy and sustainable development proposed by tourism with consideration of their dependence on natural and humane environment to move on sustainable development idea after the submission of the conception “sustainable development” from well-known Brundtland Report of The United Nations World Commission on Environment and Development in 1987. While ecology tourism is a tour form, but so far it has is no unified definition. It is way to realized sustainable tourism development proposed on the base of sustainable tourism development notion. However, ecology tourism emphasizes a coordinative development of economy, society, environment and culture, especially the development of destination community.

Table 1. Definition and connotation comparison of sustainable tourism, ecology tourism and low-carbon tourism Sustainable tourism development

Eco-tourism

Low-carbon tourism

Definition and intonation

When maintaining and improving prospective chance for development, it should meet the needs of visitors and local people. It will safeguard the fairness to help people achieve social, economic and esthetic satisfaction in the process on protection of cultural completeness, basic ecology process and bio-diversity and life-maintenance system. (Global 90’world conference file «Action strategy on sustainable tourism development»)

It is a principal tour from visitors to natural district which not only requires the protection of the completeness of ecology environment and local culture, but also maintains and improves the living standards of local residents. (International ecotourism Association,1993)

It is a kind of tourism form to calculate and control the emission of CO2, and try to reduce the emission, and then take action to offset the discharged carbon.

Implication

·Development of tourism should realize the coordination between nature, society, culture and eco-environment. ·When maintaining and improving tourism development, it should ensure that all the people and their offspring, visitors and local people can receive equal satisfaction. ·Emphasizing fairness includes the fairness in the same generation and among different generations.

·It is a kind of tourism with the functions of conserving natural and cultural resource and improving community economic development. ·Its negative effect on environment is within environment bearing capacity. ·It is a principal’s travel and they play the role of environmental education to visitors and local community. ·Emphasizing mutual coordination between economy, environment, culture and society.

·It fosters low-carbon life consciousness to take responsible tourism activity to reduce the emission of CO2 in the whole process. ·Taking the activity of carbon neutralization to neutralize the discharged CO2 to protect global environment. ·Emphasizing the role of tourism is to enjoy healthy environment and to oblige to create healthy environment as well.

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What’s more, sustainable tourism development aims to meet people’s satisfaction with emphasizing the fairness between regions and generations as well. The notion of low-carbon tourism is a tourism idea for realizing sustainable tourism development. It adopts single measurement index to limit CO2 emission in travel to reduce green-house gas’ impact on global climate so as to contribute to preserve global climate environment. Compared with ecology tourism, low-carbon tourism does not involve tourism community and its culture, and there is a requirement to help and improve local people’s life. It just focuses on target, on the responsibility for ecological environment of tourism; and it also decomposes tourism’s social responsibility into the whole procedure with quite clear notion and target (Liu X., 2009). Because measurement index of low-carbon tourism is simple, workable with broad coverage, it is very easy to be propagandized and it also can be used to test various sectors tourism involving with popularity of application and is suitable for various tourism activities all over the world.

Assumption on Operation Framework System of Low-Carbon Economy Developing low-carbon economy is a brand-new and complicated try for tourism which needs to construct an inner linkage operation framework including power system, supportive safeguard system, main participants system and realized target system guided by sustainable development and low-carbon economy (See Figure 2). If making a comparison of the low-carbon tourism development to a future express of tourism development, the four systems of the operation framework is the four wheels to ensure the express heading to the destination normally and safely. They are complementary and important. Specifically speaking, each one plays the role as follows: •

Figure 2. Operation framework of low-carbon tourism

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Power subsystem guided by sustainable development and low-carbon economy consists with the inner drive and the outer force. The former refers to the push from intrinsic demand of tourism development,


•

•

•

while the latter refers to the push from government and some objective facts. The interaction of pull-push and inner-outer force which is the engine of low-carbon tourism development, contributes directly to the power performance. Supportive safeguard mainly include elements such as law and regulation, supervision and control, evaluation and authentication, ideology education, R&D of low-carbon technology. It serves as safeguard of tourism development which provides all kinds of security and supplementary in order to make a good environment for low-carbon tourism development. Main participant’s subsystem of low-carbon tourism mainly includes mass participation in macro level and practical operation in tourism enterprise entity in micro level. The mass participation is just like passengers, pedestrians, and other folks related to the low-carbon tourism express, while the latter means the driver of the express. Both of them affect the express operation condition. Target subsystem is the beacon to guide the direction of express. It mainly contains

three major benefits-economic growth, social progress and environmental friendliness. Specifically, it refers to the increasing interests of tourism enterprises, the improvement and preservation of tourism environment, meeting demands of visitors, the increasing overall benefits of communities, transferring people’s production and life consumption style, etc. All these will achieve the ultimate goal of sustainable development in low-carbon tourism area and even the whole tourism industry. In short, as the beacon of the tourism express, target subsystem guides directions of the express and keeps monitoring the other three systems’ operation. Meanwhile, under the guidance, power system enables the express to start, and ensures the energy supply. Supportive subsystem provides consistent support and supplementary service during the procedure. Eventually, with the support of main participants system, the tourism low-carbon express head out to the destination to realize the organic uniform of tourism development and sustainable use and protection of resources, environment and human society to guarantee qualified tourism economy in low-carbon era.(See Figure 3).

Figure 3. Four subsystems operation of low-carbon tourism express

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Power Subsystem Low carbon tourism is an effective try of lowcarbon economic model in tourism. As low-carbon economy is a theme in the times proposed under the background of global warming which emphasizes the reduction of CO2 emission to improve global climate situation and to preserve creatures’ survival environment on the earth. Therefore, the power system of low-carbon development operation mainly includes the interaction of pull-push and inner-outer force. The outer force is the push from government, grand tendency of global low-carbon economy, wakening of public environmental friendly awareness etc, while inner drive refers to the push from market, demand of tourism enterprises’ development, the essential requirement of tourism sustainable development, the demand for human settlements improvement etc (See Figure 4). •

The outer force mainly refers to the push from government, grand tendency of global low-carbon economy, wakening of public environmental friendly awareness etc.

First of all, in the procedure of low-carbon tourism development, the motive role of government is full of importance with the responsibility of guidance, supervision and standardization. Government can construct solid administrative push platform for low-carbon tourism develop-

ment in four aspects of guidance in notion, regulation, management and capital. i) It will introduce relevant national plans on low-carbon tourism development to foster mass’s positive low-carbon tourism awareness including residents, enterprises and relative departments through various propagandas and public relation activities. Hence it can advocate a behavior habit of low-carbon consumption and economical and environmental-friendly consumption in all society to encourage people join in the upsurge of “low-carbon tourism”. For instance, now the government is initiating to build a dual society of resource-saving type and environmental-friendly type which actually offers positive development notion and direction for tourism advocating low-carbon tourism vigorously. ii) Through building and improving relevant policies and regulation systems such as management rules, law and regulation, development plans for tourism of low-carbon tourism, it can realize its legalized management for monitoring low-carbon tourism behavior from tourism enterprises, tourism and tourists which results in a positive atmosphere for developing low-carbon tourism to construct organization structure: To set up special low-carbon tourism economic development department, to distribute special staff responsible for the jobs such as making standard, propaganda and promotion, inspection and assessment, supervision and management. iii) It will lead, command, control, coordinate, supervise and manage the enterprises in tourism to move on low-carbon tourism by

Figure 4. Power system operation of low-carbon tourism development

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constructing various management organizations as tourism development department, and making relevant management system. iv) It can encourage and motivate more social capital joining in lowcarbon tourism development by inputting special capital to support low-carbon tourism economic development. Secondly, the global has entered the times of “low-carbon” economy in twenty-first century. Since The United Nations Framework Convention on Climate Change in 1992 and Kyoto Protocol in 1997 had started to talked about low-carbon economy systematically. In 2003, British President Mr. Tony Blair initially proposed the conception of “Low-carbon economy” in resource white book Our energy future: establishment of low-carbon economy. Developing low-carbon economy has caught increasing attention all over the world. There follows a series of new words and names such as low-carbon, carbon footprint, low-carbon economy, low-carbon technology, low-carbon development, low-carbon economical demonstration district, carbon productivity, carbon trade market, low-carbon life style, low-carbon society, low-carbon city, low-carbon world to create a new low-carbon era globally. Under the background of increasing global warming and booming lowcarbon economy, as the modern service sector with the characteristics of low consumption, little pollution, big employment demand and low technology requirement which benefits for lowcarbon economy, tourism will actively respond the great tendency of global low-carbon economy to develop low-carbon tourism vigorously. Thirdly, there is a growing prominent problem for global warming. People begin to reflect the way for traditional economic growth and come to realize the importance of environment protection. Thus people are starting to focus on the methods of controlling pollution, think about the relation among resource, economy and environment, and then consider about the styles of production, consumption and life etc. with the clue of green house gas emission with expect to find a new way

for economic growth with reducing CO2 emission, which is named as low-carbon economy to start the times of global low carbonization. People come to transform their own styles of production, life and survival from carbon, carbon source and carbon sink etc. Hence, low-carbon environmentalfriendly awareness is on way of growth. •

Inner drive mainly refers to the market pull, the demand of tourism enterprise, the essential requirement of sustainable development of tourism, the need of human settlements improvement etc.

Firstly, only tourism enterprises developing low-carbon tourism actively and creatively can realize sustainable development of tourism more efficiently. Therefore, the pull force of market economic approach is the core power to realize low-carbon tourism. Market pull mechanism mainly covers: i.

Adopting economic or political tools such as market price, tax, charge, finance, responsibility or compensation flexibly to initiate the power of low-carbon tourism’s comprehensive effect, to mobilize the enthusiasm of tourism market entity, to improve the construction of good market mechanism of low-carbon tourism and to realize low consumption, low pollution, low emission and high efficiency of tourism. For example, at present, some countries have increased the tax on green house gas emission and environment, started carbon trade market and drafted low-carbon technology development funds etc. ii. Visitors are eager to go back to nature, so this kind of demand makes green tourism and ecology tourism into fashion which stimulates tourism enterprises such as hotels, restaurants, tourism areas to make great efforts to green certification. As the development and enhancement of ecol-

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ogy tourism, low-carbon tourism will pull tourism enterprises forward to low-carbon tourism economy under the powerful pull force of visitor’s consumption demand. iii. Developing low-carbon products creatively and sending them to visitors quickly with new communication, multimedia, network technology and traditional propaganda channel will inspire visitors’ curiosity and experience passion to motivate their low-carbon tourism motives to promote the activity of low-carbon tourism. Secondly, in tourism enterprises, people can introduce clean production, comprehensive recycled utility of resource and energy, organize application amount of material and resource among various techniques and skills in enterprises, decrease the discharge of waste and poisonous materials, and use recycled resource maximally to increase enterprise environmental benefit which can turn into economic benefits. Therefore, it is admitted that the demand of tourism enterprise’s development is the key for enterprise realizing low-carbon tourism development Thirdly, development mission of low-carbon tourism is to achieve sustainability in tourism. In other words, low-carbon tourism is the fundamental way for tourism sustainable development with broader coverage and deeper connotation than ecology tourism. And it is regarded as optimal operation model for sustainable development in tourism. Therefore, low-carbon tourism development is the essential requirement of sustainable development of tourism. Finally, all the people are advocating “improving the atmospheric environment, improve the living environment and build a better home.” From an agricultural civilization, industrial civilization and then to present ecological civilization, people come to require improving survival environment, to cut energy consumption, to reduce pollution, and to desire for green and healthy qualified living environment without pollution and hazards. So it

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happens to offer an opportunity for developing low-carbon tourism which helps low-carbon trial from tourism areas gradually to community and further to mass residence environment.

Supportive Safeguard Subsystem Of course, low-carbon tourism development needs the support and guarantee elements such as law and regulation, supervision and control, evaluation and authentication, ideology education, R&D of low-carbon technology. •

•

Establishing and improving law and regulation safeguarding systems of low-carbon tourism. It is necessary to make supplementary legal systems such as Economic law of low-carbon tourism, Law of Recycled Economy, Law of Recycled Resource, Law of Climate Change, Law of energy policy etc. What’s more, those laws involving resource, energy and environmental-friendliness need modification which includes the laws on recycled resource and environment protection. Legislation, modification and execution of these laws can support tourism enterprise forward to the path for low-carbon economy and offer reliable guarantee for new industrialized direction of Chinese characteristic economy. Carrying out effective supervision and regulation. It is necessary to set up special administrative management organization, for instance, low-carbon economic supervision department is responsible for monitoring and controlling management of low-carbon economic development in various sectors which includes supervision for low-carbon economy in tourism. Supervision and regulation can be understood from the two levels: on one side, relevant administrative management department adopts positive measurements to encourage tourism enterprises to develop


•

low-carbon tourism, for example, offering appropriation or loan with low even no interest; the design and low-carbon tourism development can enjoy special offer in tax or subsidy; R&D for low-carbon technology can have financial support etc. On the other side, people will adopt compulsory and binding standardization, supervision and management to have low-carbon standard inspection in scenic spot periodically. If it exceeds the ruled CO2 emission standard, it has to get some penalty including degradation, fine etc. Supervision and regulation in these two aspects will effectively promote the development of low-carbon economy. Drafting assessment index system of lowcarbon tourism and carrying out tourism enterprise authentication. Government should play the leading role in organizing people from various sectors to build a special team for making assessment index system of low-carbon tourism. Their responsibilities involve selecting standard, making low-carbon tourism evaluation index system for chosen low-carbon tourism area, and eventually drafting a low-carbon assessment index system which fits for tourism characteristics which mainly includes energy consumption index, CO2 emission index, waste discharge index, resource utilization ratio index, waste recovery and recycling utilization ratio index etc. All these indexes can comprehensively indicate development of tourism economy, resource utility and environment protection etc so as to meet the needs of low energy consumption, pollution and emission etc. When standard is established, people can try to have an assessment authentication of low-carbon tourism demonstration area to start preliminary demonstration verification. What’s more, various enterprises in tourism can participate in international

•

•

ecological design authentication, clean production authentication, energy-saving product authentication, environment protection authentication etc., according to their specific products. These authentications with international standard can help to enhance enterprises image and quality level of service and product. Strengthening ideological education of mass participation in low-carbon tourism. On one hand, government and tourism enterprises will create low-carbon consumption fashion and positive low-carbon consumption atmosphere by education channel such as television, broadcasting, magazine and network etc. On the other hand, tourism enterprises will monitor and standardize visitor’s behavior and then popularize relevant environmental-friendly knowledge about low-carbon tourism by brochure, mark system in scenic spot, environmental-friendly theme education. What’s more, in youth education, school is a best place to organize environmental-friendly theme activity of “low-carbon tourism”, to collect environmental-friendly compositions, to have low-carbon tourism practice etc, which can enhance youth’s low-carbon environmental-friendly consciousness. While in mass education for adults, lowcarbon consumption or low-carbon life can be advocated. For example, usage of environmental-friendly bag, adjustment of air-conditioner in the room, recycle usage of life materials, the employment of public transportation, the public’s enthusiasm on low-carbon consumption can be motivated by the ways of encouragement, special offer even points or lottery. Speeding up the R&D procedure of lowcarbon economic technology. People will increase international cooperation and communication of low-carbon technology, for example, there are carbon captures and

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CCS technology, recycled energy development and utility technology etc., which can improve Chinese R&D level of lowcarbon economic technology. Moreover, people can support R&D of low-carbon economic technology by setting up special low-carbon technological R&D fund, making plans such as the strategy on carbon reduction technology.

Main Participants Subsystem The idea of low-carbon tourism mainly copes with artificial behavior of over-emission of CO2. So the essence of low-carbon tourism is to regularize human’s behavior, that is to reduce artificial CO2 emission, “human” refers to tourism economic entity and visitors, therefore, main participants system of low-carbon tourism mainly include mass participation in macro level and practical operation in tourism enterprise entity in micro level. First, it’s in the Macro level. It refers to public participation. Because tourism is a sector with high relevance involving a lot of sectors and people, low-carbon tourism development needs cooperation in macro level of social public. The social public mainly includes visitors, local com-

munity, government manager, media, preservation organization, academia, volunteer organization, low-carbon tourism economic non-profit folk organization, agriculture, industry, finance sector, scientific research organization etc. All of them play their own role to form a paragenesis group with information, capital, material, talent and technology which results in the smooth work of low-carbon tourism development and sustainable growth in tourism area (See Figure 5). Second is the Micro level. It is the practical operation of tourism enterprises. Tourism enterprises are management entities of resource, energy, material consumption, production and service of tourism product, so developing low-carbon tourism should start from every tourism enterprise. In tourism area, people can develop low-carbon tourism to achieve the reduction of CO2 emission, the damage to resource environment, and the consumption of material energy in order to finally accomplish low-carbonized tourism production, sale and service through adopting clean production, environmental-friendly packing, green consumption and low-carbon processing technology etc. Low-carbon tourism development in micro level of tourism enterprises requires all relative entities along the sector line such as tour-

Figure 5. Public participation in low-carbon tourism development

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ism exploiters, hotel managers, managers of travel agency, tourism transportation departments to observe the notion of low-carbon economy and regularize themselves by the theory of low-carbon economy and sustainable development. They should set CO2 emission index in all steps from internal management idea, corporate culture, strategic development, staff training to external product exploitation and sales, tourism service etc should adopt all kinds of new methods and technologies to restrict various energy consumption and polluted discharge amount of unit product within low-carbon range to monitor whole process of tourism operation according to lowcarbon quantified index strictly.

environment interests and ecological interests, all these will achieve the ultimate goal of sustainable development in low-carbon tourism area and even the whole tourism industry.

Implementation Scheme on “SixElements” of Low-Carbon Tourism

Tourism initially develops low-carbon economy with its advantages. Its expected reachable targets mainly contain three major benefits--economic growth, social progress and environmental friendliness, and achieve the integration of these benefits. Specifically, it refers to

As the tangible carrier of low-carbon tourism development, tourism area is the tourism space region offering visitors various activity projects and services including tourism infrastructures and entertainment facilities. And it is the location of visitors’ expectation and real consumption. As the carrier of tourism activity, it surely plays the main role of practice and operation subject in low-carbon tourism economy. This article tries to propose specific implementation scheme of low-carbon tourism in tourism area beginning with tourism six elements foods and beverages, accommodation, transportation, travel, shopping, entertainment and recreation. (See Table 2 and Table 3)

i.

•

Target Subsystem

Increasing the overall interests of tourism enterprises, tourism communities and the whole tourism industry, especially the contribution rate of tourism green GDP. ii. Meeting various tourism demands of visitors longing for nature and green ecology, improving low-carbon consumption consciousness of visitors and the public, transferring people’s production, life and consumption style, and creating thick low-carbon social atmosphere. iii. Improving the utility ratio of resource, energy and material, preserving ecological environment of tourism area, bettering living condition of local residents. iv. Realizing the coordination of various entities’ interest such as tour operators, visitors, community residents, the public and the unity of economic interests, social interests,

Foods and beverages in scenic spot. In terms of architecture material of hotel, energy-saving bricks are best choice. And hollow wall, roof insulation layer, antiwind device and double glass windows will be used to construct green environmental-friendly restaurant and it can apply for international environmental-friendly standard authentication. In terms of food, people will try to buy seasonal green vegetable, rice and poultry from local farmers to guarantee the supply of green food. In terms of structure of food type, it can adjust visitor’s diet structure with local food to avoid too much meat and special food to prevent some disease so that to secure visitors’ diet health. What’s more, having clean production, saving water, oil, gas, and coal, offering green catering service, disposal

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and recycled utility of kitchen refuse, domestic garbage, customer rubbish, oil fume, waste water etc will help to form automatic integrated catering operation model. Accommodation in scenic spot. Architecture material, energy consumption and service commitment will be sustainably recycled to build low-carbon tourism hotel which can be upgraded to environmental-friendly hotel by ISO14001 authentication. For instance, the material that is cool in summer and warm in winter is the best choice as the architecture materials; which is actually the characteristics of traditional architecture material. Japan is a good example in this aspect. In energy consumption, try to reduce the energy with large carbon emission, use more recycled clean energy such as wind power, water power and geothermal energy. In physical utility, reduce the time of changing and

•

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cleaning of linen, use recycled paper, recycle the garbage of guest room and office. In service commitment, following foreign environmental friendly hotel, don’t offer “six tools”in room and launch the project as “low-carbon environment-friendly points and coupon” to encourage clients low-carbon consumption. In specific details, adjust temperature of air-conditioner from used 26 centigrade to 28 centigrade, and 20 centigrade in fall and winter, equip with some lighting, air-conditioning, fridge and digital television which fits for energy-saving measurement. Transportation in scenic spot. The key point is to realize energy-saving, emission reduction, and usage of clean energy, and even zero emission. For example, in terms of sightseeing forms, trekking mount trail, sightseeing by bike and “roaming” are advocated. For the choice of transportation vehicle, try to apply more traditional lit-

Table 2. Execution scheme on Six elements of low carbon tourism Elements

Low-carbonized execution scheme

Foods and beverages

Energy-saving architecture materials are best choice. Try to buy low-carbon foods with reasonable food structure of proper amount of meat and vegetation. having clean production, saving water, oil, gas, and coal, offering green catering service, disposal and recycled utility of kitchen refuse, domestic garbage, customer rubbish, oil fume, waste water etc to form automatic integrated catering operation model.

Accommodation

Energy –saving architecture materials, the application of recycle clean energy. In the build, it can use more recycled clean energy such as wind power, water power and geothermal energy. Reduce the time of changing and cleaning of linen, use recycled paper, recycle the garbage of guest room and office. In service commitment, following foreign environmental friendly hotel, don’t offer “six tools ”in room and launch the project as “lowcarbon environment-friendly points and coupon” to encourage clients having low-carbon consumption.

Transportation

Trekking mount trail, sightseeing by bike etc, “roaming” is recommended. Try to apply more traditional litter, environmental-friendly electromobile, steamer and carriage etc. decrease the pollution results from automobile exhaust to offer adequate self-rehabilitation time and space for ecological natural environment of scenic spot.

Travel

Manager of tourism area should offer various ecological tourism products and tourism reception facilities, improve scenic spot marking and guiding system, apply carbon emission calculation device in control management of visitors’ carbon emission in scenic spot to real track visitors’ carbon emission and tell them the message in time etc. Visitors need to practice the notion of low-carbon environmental friendliness in the aspects of behavior and consciousness to form a good low-carbon tourism habit.

Shopping

Â€Â€Â€Â€Â€Â€Tourism daily consumption and tourism souvenir in scenic spot should try to apply various environmental friendly materials, recycle materials to adopt manufacture technique matching with local cultural tradition, clean processing production and manufacture to reuse those wastes.

Entertainment and recreation

510

Reduce waste, save energy, decrease all the noises, deal with all kinds of garbage scientifically.


Table 3. Carbon emission of relevant elements Elements Transportation

Energy

Construction

Item plane

Emission of CO2 Economic class: 0.0912128 CO2 per kilometer Business class: 0.1368193 kg CO2 per kilometer First class: 0.1824257 kg CO2 per kilometer

train

0.0086467 kg CO2 per kilometer

ship


Car, and motorcycle

Petrol:2.251485 kg CO2 per liter Diesel:2.700633 kg CO2 per liter

bus


Trolley bus


metro


electricity

0.9043807 kg CO2 every degree

Natural gas

2.165015 kg CO2 per square meter

gas

0.70673 kg CO2 per square meter

Kerosene

3.151713 kg CO2 per kilogram

Coal

1.973984 kg CO2 per kilogram

LPG

2.953847 kg CO2kg every cube

Coal heating

47.64812 kg CO2 every square meter

Gas heating

32.59689 kg CO2 every square meter

Annotation Choosing proper transportation vehicle to achieve minimal carbon emission according to mile distance, time allowance and route design etc.

Selecting suitable energy according to population and usage to mix the application of various energies to realize minimize carbon emission.

environmental friendly materials hollow wall and roof insulation layer Wind-prevention device, double glass window, solar power facility etc

To calculate various constructive landscapes according to relevant criteria of low-carbon environmental friendly design

Various energy-saving electronic devices Notes: 1. Mainland of China has average 2.7 tons of CO2 per year. Â€Â€Â€Â€Â€Â€Â€Â€Â€2. Recycle energy includes solar, wind, water, ground-source heat and tide power.

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ter, environmental-friendly electromobile, steamer and carriage etc. Moreover, increasing some vegetation transition zones can help to cut the pollution results from automobile exhaust to offer adequate time and space for self-rehabilitation of ecological natural environment in scenic spot. Sightseeing in scenic spot. On one hand, managers of tourism area should offer various ecological tourism products and tourism reception facilities, such as ecological washroom, improving scenic spot marking and guiding system which instruct visitors to have low-carbon tourism activity that is regarded as an effective channel of in-

teraction between the tourism areas with visitors. Besides traditional brochure and guide pamphlet, tourism area can adopt high technology such as mobile communication and internet technology etc., to convey the guiding messages of scenic spot to visitor’s mobile phone, scenic spot digital screen instrument or to send uplifting notes to encourage visitors’ low-carbon tourism anytime and anywhere. What’s more, applying carbon emission calculation device in control management of visitors’ carbon emission in scenic spot can real-time track visitors’ carbon emission and tell them the message in time etc. On the other hand, as the main

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participants of sightseeing in the area, tourists need to practice the notion of low-carbon environmental friendliness in the aspects of behavior and consciousness to form a good low-carbon tourism habit. For example, tourists will choose train or bus on journey, try not to change sheet and towel in hotel, use cloth bag instead of plastic bag, reduce the usage of one-off chopsticks, put the garbage into the recycling place orderly etc. •

•

Tourism shopping: Tourism daily consumption and souvenir in scenic spot should try to employ various environmental friendly materials and recycled materials, adopt manufacture technique matching with local cultural tradition, clean processing production & manufacture, and reuse those wastes. Tourism entertainment and recreation: Reduce waste, save energy, decrease all the noises, and deal with all kinds of garbage scientifically.

DEMONSTRATION ANALYSIS ON LOW-CARBON TOURISM AREA Case One: Shenzhen OCT East National Ecological Demonstrative District The Profile of Shenzhen OCT East Tourism Area Shenzhen Oct East national ecology demonstration district locates in Sanzhoutian of Yantian zone of Shenzhen with ecotourism, holiday, sport and recreation as themes, “help urbanite back to the nature” as the goal, culture tourism as characteristics. And it is a demonstrative ecotourism area acknowledged by national tourism bureau. Scenic spot is in the size of 9 square kilometers with an investment of 3.5 billion Yuan. During the process of plan and construction, it has involved the

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idea of ecology, low-carbon and environmental friendliness. Sanzhoutian of Yantian zone in the east of Shenzhen is the region with best ecological environment. In terms of traffic condition, there is Yanba highway in the south, and the entrance in the southeast and southwest. There is also Yansan road. The difference of elevation is from 11 meters to 136 meters with the terrain of high in the north and low in the south. There is a catchment area in the south. Most part of this region has a large slope, while the middle region along the river has the small slop. And there contains large area beneath 25 degree which is suitable for construction. Slop plays small impact on road, and slop direction is mostly to the south and east. In the south, people can see big Meisha beach and gulf. In the terms of vegetation, it mainly plants tree and fruit forest. Trees are the symbiosis of tree and shrub, fruit forest is mainly litchi, and there are a lot of artificial slope protections as well. In terms of hydrology, the southern water source is mainly from the upstream of Shangping reservoir, and there is a San Zhoutian reservoir supplying for residents’ daily water upside. OCT east is ranked as the first national ecological tourism demonstrative zone by its detailed eco-plan and arrangement with the natural original environment advantage. These tourism areas such as OCT East, big and small Meisha beach parks, and Ocean World etc constitute Dapeng peninsula tourism zone in east of Shenzhen with the market for Taiwan, Hong Kong, Macao and the whole Pearl Delta.

Content of OCT East Green Low-Carbonized Design Oct East creatively designed three theme parks such as ecoventure valley, tea stream resort valley and wind valley which combine with ecological entertainment, recreational holiday and outdoor sports. It observes the design notion of “reasonable and recycle utility of ecological resource, harmonious coexistence of human and nature”.


People keep in mind the viewpoint of “Ecological protection is the most important” as the leading principle in the whole process of project planning. Then the article will introduce the content of various ecological and low-carbonized green environmental friendly design presented in three theme parks. (See Table 4) •

Ecoventure Valley

It is a place with the size of 5 square kilometers facing with golden coast of east of Shenzhen. It chooses “Forest, sunshine, land, river and sky” as theme elements, human’s complete exploitation for broad range of nature as the main clue, and it is the mixture of suburban hillside park and urban theme park. Its green low-carbonized environmental friendly design mainly presents in following two aspects: Broad utility projects of new recycled energy: Windmill and hydroelectric generator. There are many windmills along the green ridge of ecoventure valley. It is more than a scenic spot, it is also the first tourism landscape of wind power plants group. It can produce 2million degree of electric with the supplement from some small windmills and wind wheel power. What’s more, there designs a big reservoir behind the artificial waterfall of ecoventure valley to realize rain collection for electric power and recovery and storage of waterfall water. Therefore, it makes the waterfall of ecoventure valley which is regarded as the first artificial waterfall of China with the combination of power generation by reservoir and wind. This waterfall is 300 meters long with terrain fall of 70 meters and flow fall of 42 meters facing with the sea and its water can be recycled. ii. Zero pollution of traffic system: Many electromobiles and weckers shuttle in the scenic spots which are named as “Green Trip” to prohibit the entrance of any motor i.

vehicles. It also design the motor woods cable cars, and small train in the forest connecting with Tea stream resort valley and ecoventure valley to be a scenery to realize zero traffic system Specifically speaking, lanes of cable car and small train match with the trend of mountain to choose the route guided by landscape ecology theory. It avoids the ecological weak zone to select the district with stronger ecological recovery ability. Moreover, it partially adopts trestle bridge design to avoid the cleavage of migration path of wild animal to secure continuation of creature living environment. What’s more, the route of cable car, wecker and green bus goes along the existing Yan San road. Those new roads will use few cements which contain potential effects on environment. And the recovery of plant on two sides of cliff is to realize the slop protection and green recovery to minimize the effect from soil and water loss to achieve the combination of ecological green landscape with soil and water conservation. Restle in bamboo adopts low-pollution materials which is natural moth and moisture proof log imported from Finland with hollow design. And there leaves the passage for animal migration beneath it to reach the continuity of ecology. •

Tea stream resort valley

Tea Stream Resort Valley is integrated by eastern and western culture and characterized by tea, zen, flower and bamboo.There consists of four tour zones including Interlaken, Ancient Tea Town, Sanzhou Tea Garden and Wetland Garden. It enables urbanites to get away from the city and to embrace nature. This valley is exploited from an original natural tea garden with realizing coordination of original environment with artificial vestige. It includes following ecological environmental friendly design:

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i.

It adopts the water purification technology of efficient vertical flow artificial wetland system, builds artificial wetland system integrated with sewage purification, environmental scenery and popular science education.

This artificial wetland integrating with the functions of popular science education, environment preservation and scenic spot includes two forms: diffusion flow wetland and vertical flow wetland. Diffusion flow contains two desilting ponds, one aerobic pond and two plant ponds with the size of 7000 square meters. Vertical flow wetland includes one desilting pond and six vertical plant ponds with the size of 8000 square meters. The system has particular structure and flow model. Artificial wetland system water purification is an ecological project method. Its basic principle is to plant certain wetland vegetation on the fillers to establish a artificial wetland ecological system. The water filtered by this system can reach the standard of 3 degree to be discharged into Sanzhoutian reservoir directly. So it suits for the preservation of Sanzhoutian drink water and landscape water, the whole system has relatively small size with long-term and stable operation. Besides peculiar wetland plant, there grows a lot of aquatic plants perfect for appreciation. For example royal water lily, water lily, penh calamus and American arrowhead etc. all these create beautiful scenery of flowering in four seasons. This wetland not only plays the role in supplying and conserving water resource, degrading pollutant, preserving plant diversity and living water resource, it also nurtures some precious frogs, and there increases more and more creature types, so there is a distinctive environmental coordination function and ecology effect. Moreover, most districts in Sanzhoutian is mountain and hill, many scouring ditches form natural runoffs. Artificial wetlands then play great role in flood control and drought resistance. And evaporation of wetland produces humid climate

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in nearby region which helps to stabilize regional climate condition and adjust regional climate. ii. Supplementary system with solar and wind energy: In tea stream valley, people can see the road lamps with solar and light energy. It fully makes use of meteorological resource to realize the power generation day and night and supply other use of electricity. This supplementary system of solar and wind can improve stability and continuity of systematic power supply. As wind energy is stronger at night without sunshine, this perfect supplement can save solar panels to greatly cut the cost of system. iii. Diversified and beautiful ecological passage: Various ecological passage designs can effectively protect original tea garden, Sanzhoutian reservoir, and creature’s living condition so as to guarantee safe communication and migration of creature and their diversity. It mainly includes Red-feather trestles, anxiety-free corridor, wetland corridor, tea stream trestle, tea ridge wood pavement, ample stream Vine Bridge, bamboo stream Cable Bridge, tea ridge corridor etc. Those are the most unique ecology demonstration scenery line in OCT East, especially in tea stream valley. For instance, tea stream trestle crosses two hills and wetland protection zone of the branch of Sanzhoutian reservoir. It is constructed by logs which effectively preserves ecological environment of natural Sanzhou tea garden. At the same time, it secures the normal flow, water quality and living condition of aquatic creature along wetland protection zone of Sanzhoutian reservoir branch to realize continuity and diversity of existing ecological environment. What’s more, it adds attractive scenery in valley from where people can look around this pure natural tea garden. The most amazing is the whole design not only observes the notion of EI, it also makes special design


on people load volume. The general volume of the bridge is 80 people. But it is said this bridge has carried about 500 people on 8th of March in 2008. It indicates this bridge can achieve favorable economic social effect when guaranteeing ecology effect. And it is a good example for similar air trestles or cable bridges in the valley. iv. Marvelous “Fantastic Happy Bamboo valley” is an ecology fancy land changing waste into the valuable, a miracle for ecological environmental friendly design. It used to be a spillway ditch, designers and constructors worked together to adopted the creative idea of “dividing mountain water, lifting the ground”. They full used the protozoan bamboo in the ditch to open the enclosed channel on its two sides with covering bamboo plaited basket, and put some cane chairs and instruments made by bamboo tube in the ditch. When wind blows, there produces charming bamboo music to make this place attractive. So people magically turn a waste water channel into a popular leisure heaven. The ecology idea of “dividing and lifting” creates a nun-pollute back yard garden. Survey proves that tea stream valley is the area with greatest ecology demonstration significance in OCT East. Not only in ecology plan, design, construction, also in present management operation and later tracking protection, it shows the notion of ecology and low-carbon to effectively preserve interaction between ecology and humanistic tourism to achieve win-win effect of ecology and economy •

Wind Valley

Wind valley sports park with the size of 2.5 square kilometers depends on unique natural scenery of OCT East with taking leisure, adventure, sports, recreation and Olympic sports game as the mainline to represent the most distinctive

outdoors sports tourism culture. It is an outdoor sports leisure base centered with golf, and outdoor Olympic sports training base and wild survival training base as another two main supplementary parts. Location of Golf course of wind valley is between altitude 324 to 451 meters, and terrain fall is 127 meters with steeply and splendid terrain. It is made of two high-grade 18-hole golf courses, one is membership golf club, the other is public golf club. Every 18-hole course has a top clubhouse which is a club with the ability to undertake international top golf event. Public golf course of wind valley pursues original scenery which displays the beauty of wildness, honesty, nature and ecology, so it is named as the top qualified golf course of China and landmark course in Shenzhen. As the key part in golf course, lawn needs fertilizer and pesticide which may go to rive, stream or pond through surface runoff to produce a series of ecology effect to influence aquatic ecological environment. Therefore, the golf course suffered various doubts and obstacles before, in and after its construction. However, OCT East adopted a series of measures to avoid and decrease negative effect to water region, water and soil in the construction and operation when striving for building mountain golf course. It mainly represent in following two aspects: i.

Vegetation: Except some course vegetation for landscape need, most vegetation is original. What’s more, a part of course used to be the wasteland with less vegetation. So the vegetation and lawn of course should have ecological design in most degree to realize the protection of mountain soil original appearance and living condition of all plants. The type of lawn used in tee, fairway and the green should bear the characteristics of anti-trample capacity, anti-pruning capacity, strong resistance, being hard to squeeze leaf juice. The lawn in the rough should be suitable for extensive management, weeds

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Table 4. Green Low-carbonized design and strategy of Shenzhen OCT East National ecological tourism demonstration zone Park Ecoventure Valley(Sightseeing and recreation district)

Facility type Power facility

Wind valley(Golf sports park)

windmill in the air

Ecological road design

Try to avoid ecological weak zone to use existing passage, try to adopt unpolluted materials such as Finland log, pebble etc to preserve completeness, continuity and health of biological habitat.

Environmental friendly traffic vehicle

Adopting electronic-power cable cars, small trains, electromobiles, weckers and green bus to protect atmosphere environment.

Project of Slope protection and green recovery

Pay attention to the recovery of cliff vegetation along two sides of road to avoid water and soil loss

Construction facility

Ecoventure artificial waterfall

It realizes intensive utilization with the successful case of “combination of outer landscape and inner green office construction”

Sewage purification facility

Artificial wetland

Integration of sewage purification, landscape and science education to conserve water, degrade pollutant, protect creature’s diversity, adjust climate, regulate flood and resist drought etc to safeguard reasonable recycle utilization of water in the park.

power facility

Solar and wind supplementary system

Supply 24-hours continuous power for lighting and monitoring system in the park

Road establishment

Ecological passage

Adopting overhead device, log construction, and transforming the exiting passage to secure creature’s normal migration, diffusion and communication

Landscape establishment

Slope sundial

Sundial, as a landscape, is used to time with the fundamental goal of slope solidification, water and sole loss avoidance and slop slipping prevention

Service facility

Interlaken ecological hotel

Adopting compost and biogas technology and airconditioning heat recycled utilization etc.

Green commercial service facility

Don’t supply one-off foaming plastic production and tableware. All souvenir and products adopt environmental-friendly technique with environmentalfriendly materials.

Daily public facility with low energy consumption

Widely using green and nonpoisonous materials, water-saving tool, and recycled paper

Ground sewage collection system

Preventing the influx of pesticide and fertilizer into the underground runoff to affect the water in reservoir to have dredging control and dispersion prevention.

Sewage discharge and treatment facility

Sewage treatment pond in the zone Ground water and soil safeguard facility

SDI and control system

hard to invasion etc. While the choice of landscape vegetation in the course should be the green conifer adoptable to local weather

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Intonation characteristics Unpolluted wind and water power is adopted to protect the atmosphere and supply the energy consumption of 24-hour control lamp and artificial waterfall elevation.

Hydropower Traffic facility

Tea stream valley(Original tea park)

Design and strategy on green low-carbonization

Monitoring the demand of pesticide, fertilizer and water to supply according to the demand to be environmental friendly.

and soil condition and strong to resist local disease and pests, and deciduous plant will be the boarder tree surrounding the course.


The porous and fertile sandy soil with good drainage is the best choice for vegetation with convenient and qualified water source, broad, flat and sunny terrain sheltering form the wind. ii. Preservation of water and soil: the earthwork in course villa is used to build terrain and fill the basement which prevents the abandoned soil, stone and waste residue effecting water and soil loss and groundwater level. In management of course lawn and vegetation, in terms of application of large amount of pesticide and fertilizer and sewage treatment, people try to avoid and reduce various water ecological effects: to choose relatively more environmental friendly pesticide and fertilizer, to install subsurface drip irrigation and control system to monitor the demand of pesticide, fertilizer and water in order to save the resource, to establish underground sewage collection system.[28] There is sewage treatment pond whose capacity is better than the treatment in wet season. The treated water can be used for irrigation. Another part of water will discharged in deep layer of ecology wetland to eventually reach the quality standard of domestic water.

The Content of Construction of LowCarbon Software System of OCT East OCT East inherits the idea of “Ecology goes first” in design, construction and management to create a new model of paying equal attention to both tourism development and preservation. It practices a new ecological management mechanism to set an example for domestic natural ecological tourism zone to achieve first management criteria of national ecological tourism demonstration zone. 1. Constructing green operation management system to promote comprehensive lowcarbon environmental friendliness. It sets

up the access mechanism of environmental friendly operation, personal economical management mechanism to reach positive, resource economical and environmental friendly operation cycle. The specific strategies are as follows: Scenic spot will carry out GB/T24001-1996(ISO14001-1996) environmental management system certification; it establishes emergency plan, emergency response programme and measurement for important environmental aspects such as water environment in scenic spot. It advocates “Green Trip”; motor vehicle is not allowed to enter core scenic area; do not supply food for wild animal; do not use one-off foaming plastic product and tableware; Do not sell survivor or product made by nonenvironmental friendly skill, technique or materials; do not over-pack; ticket or guide map will adopt environmental-friendly paper; scenic spot or hotel will use electronic billboard; hotel or hostel carries out economical management; executing water sorting recycle, establishing application system of recycled resource; there is complete execution of consumption-cost, environmental friendly new office system which includes promoting no paper officing, using business card with environmental friendly materials, room temperature should be higher than 26 centigrade in summer, and no more than 20 centigrade in winter etc. 2. Mixing entertainment with education, actively propagandizing environmental ideology of low-carbon tourism and healthy green lifestyle to lead new era of low-carbon tourism. OCT East encourages clients to practice low-carbon tourism and healthy green life style in the aspects of food, accommodation, transportation, travel, shopping, entertainment. It includes: Organizing low-carbon festival activity occasionally, For example, it has hold a series of theme activities such as “2010, love with the earth”, “enjoy

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low-carbon holiday with hill and water” to advocate low-carbon tourism; produce star product of low-carbon tourism, for example, low-carbon evening show “ Hidden design of fate”, low-carbon (solar energy)Interlaken express, first domestic vocational tourism electronic network consumption scenic spot, low-carbon Interlaken hotel, low-carbon demonstrative life zone of “happy family”, contest of low carbon creativity. There will organize a set of various, rich and instructive low-carbon theme activities to advocate low-carbon idea and environmental-friendly point of view to lead more fashionable lowcarbon life ideology and healthy lifestyle. It will also have a series of green marketing events to guide tourists to practice green tourism which includes green triangle, construction of green recreational world, green storm, establishment of green new city fund etc. to achieve ecological tourism resort. All these low-carbon propaganda and projects aim to guide people form an idea of low-carbon life, consumption and tourism in daily life. 3. Strengthening the cooperation with enterprise and college to promote the procedure of low-carbon tourism. It includes: OCT East cooperates with Shenzhen airline to set up first Chinese tourism-airline lowcarbon compensation scheme, plant “carbon compensation wood” to call for people having low-carbon lifestyle, it also promises to organize a series of environmental public activities to set “low-carbon” as one important principle for enterprise’s future behavior; It works with Shenzhen branch of China Mobil Guangdong limited company to start first domestic tourism-communication industry low-carbon application scheme named as “Travel OCT East with wallet of China mobile” which promises a series of information application with low-carbon idea. It includes to advocate green ecological

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tourism and practice low-carbon economy with some mobile information products such as new mobile wallet, two-dimensional code electronic ticket, 139.com etc; It also set up first domestic “national low-carbon tourism college” with Shenzhen TV university, it mainly built relevant low-carbon majors or courses such as low-carbon tourism management, hospitality management, tourism English tailoring with OCT East project characteristics with supplying technical and bachelor education. Meanwhile, it set up low-carbon tourism research, consultant and training centre to have teaching, research and various quality training. Through cooperation with airline, communication and education sectors on low-carbon communication and practice, it will fully play tourism’s comprehensive drive effect which will help the influence and propaganda of low-carbon ideology into other industries and build a solid foundation for low-carbon tourism development.

Case Two: Nominator of World Natural Heritage – Mt. Danxia in Shaoguan City Mt. Danxia locates in the city of Shaoguan of Guangdong province with the size of 290 square kilometers. And it is one of the “Four top mountains” in Guangdong province including Mt. Dinghu, Mt. Xiqiao, Mt. Luofu and it is named as the most splendid mountain in Ling-nan. Since 1988, Mt. Danxia has been ranked as national scenic spot, national geomorphologic nature reserve, national 4A tourism district, national geological park and international geological park. As the naming place of Danxia landform, Mt. Danxia is made up of 680 gravel rocks with flat peak, cliffy mountain and gentle foot with the characteristics of bare and red cliffs. As Mt. Danxia represents a red-peak-forest structure, there are 680 various stone peaks, stone walls, stone pillars and stone bridges displaying


themselves as large quantity of peaks erecting as forests and growing of alternative density, or wellproportioned, or special and unique in shape, or extraordinary as if done by the spirits. As a matter of fact, it very much resembles a garden of ruby sculpture and therefore is called “Red Rock Park of China”, where scenery is characterized by being majestic, perilous, picturesque and beautiful. According textual research of geologist, among more than 1200 Dan Xia landforms in the world, Mt. Danxia is the district with the most typical evolution, completed types, abundant models and beautiful sceneries. Its typicality, representativity, diversity and irreplacebility are embodied in its research work in a highly exhaustive and deep-going way. What’s more, it carries out the study in the field of Danxiashan geomorphology in connection with strata, structures, landform expressions, environment in which it has been developed and evolved, and it has now become a national or even worldwide base for academic research, popular science tourism and teaching practice. What’s more, there are zen Buddhism and more than 80 grotto temple ruins. Ancient literacy has left many legends, poems and Cliffside carvings here to make it full of historical and cultural significance. At present, Mt. Danxia has developed to be a tourism area centered with sightseeing, integrated with scientific research, investigation, rock-climbing, adventure and recreation. The scenery is characterized by being majestic, perilous, picturesque and beautiful. Nobly graceful and uniquely distinctive, Danxiashan Global Geopark has been proved to be a treasure of nature. This geopark is composed of several Scenic Spot Areas, called Danxia, Shaoshi, Bazhai, Aizhai and Jinjiang Long Corridor, respectively. Tourist Areas of Elder Peak, Yangyuanshi (Male Stone) and Xianglong Lake of the Danxia Scenic Spot Area have already been opened up for the present. “Chinese Danxia” combined by Mt. Danxia of Guangdong province, Tai Ning of Fujian province, Mt. Longhu of Jiangxi province, Chishui of Gui-

zhou province, Mt. Lang of Hunan provice, Mt. Jianglang of Zhejiang province were nominated as the project of Application of World heritage in April of 2009. As nominated place of world natural heritage and international geographical park, Mt. Danxia possesses incredible good natural resource. What’s more, construction and development of Mt. Danxia is always guided by ecological and low-carbon mentality to have restrictive development in scenic spot to guarantee completeness of geography and landform and variety of ecological vegetation so as to fulfill harmonious unity of economic, ecological and social benefit. Not long ago, Mt. Danxia scenic spot of Guangdong province has got the prize of “Top ten Cultural Ecological tourism brand in China” in the conference of Chinese folk ecology tourism culture development of 2009. A series of low-carbon environmental protection measures of Mt. Danxia tourism area in the hardware system design and the software system design will be emphasized as follows, it aims to achieve ecological sustainable development and lead natural scenic sites to the times of low-carbon tourism economy.

Content of Mt. Danxia Green LowCarbonized Hardware System Design •

Road and traffic facility. The entrance of Mt.Danxia scenery spot builds ecological parking lot to help self-driving visitors’ parking to cut air pollutant emission in the center of scenery spot to protect ecological vegetation. The establishment of ecological parking lot is totally hugging the terrain to choose the flat and broad region so as to avoid huge resource consumption of woods and soil. Meanwhile, people have reasonable greening in parking lot, that is, to plant tall trees around the lot, to plant shrubs among parking stall, and the ground is all greening parking area to plant antipressure grass. All the tourists are asked to take environmental friendly vehicle with

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low noise and emission in the key area. And the roads, trestles and walkway are built according to the standard of world culture preservation. The choice of materials of trestles and walkway in the key area concerns about authenticity and ecology, most of them is local red gravel stone board and wood with features of safety, environmental friendliness and endurance. Finished Wolonggang forest ecological tourism walkway in Baota peak is one of key projects for Mt. Danxia’s application for World natural heritage tourism, and key route for the experts of Mt. Danxia’s application. It is 4 thousand and 3 hundred meters long, the overhead constructs the board to guarantee the growth and communication of creatures on the ground. The construction of this project strictly follows the requirement of ecological tourism walkway and scientific survey. On the way, there are abundant scenery resource, completely preserved ecological vegetation, diversified creature and distinctive terrain characteristics. Architecture facility. In the tourism area, there are appropriate numbers of buildings with proper size. And most materials are local gravel sedimentary rocks and other qualified stuff without mosaic path, glass screen wall and iron sheet shed etc. And it pays attention to the privacy of the building, pipeline and functional facility construction. What’s more, it is prohibited to randomly set up individual booth to cut garbage pollution source and electricity hidden hazards etc. There establishes proper visitor service center and environmental monitor spot to be responsible for consultant, environmental hygiene supervision, fire-proofing and hazard prevention etc. These buildings locate in the region with proper terrain and size to secure costsaving and environmental friendliness.

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Sightseeing and visiting facility. Many visitors like to choose cozy bamboo raft tour in beautiful Mt.Danxia. The bamboo raft drifting locates from Shixia village of Jingjiang river to Niubi bridge in 8 kilometers which is a distinctive ecological tourism project in Mt. Danxia. Raft is made up of 16 thick bamboos bound together where puts six bamboo backed chairs. There are two boatmen and one guide in every raft. And tourists can appreciate the beauty of nature, and charming of Mt. Danxiashan. This sightseeing programme bears the feature of ecology, environmental friendliness, low consumption and emission and memorable to visitors. On the way of Elder peak, tourists can see another special sightseeing vehicle in Mt.Danxia—manpower decorated sedan chair. Four strong local men make a sedan chair team. Every sedan chair will be checked and numbered, and tourists can get to the Elder Peak by riding it. This facility not only full uses human resource to help local people get some economic interest, it also decreases resource and energy consumption and carbon emission to minimize the ecological effect in the tourism area. Organizing environmental friendly activity with advocating low-carbon life and tourism. Treking cross Mt. Danxiashan is one important global activity after it successfully passed UNESCO’s experts’ field evaluation for world natural heritage application. So far it has hold once and the plan for the second is on the way. The trekking route mainly refers to the country path without the interference from modern transportation which covers Mt.Huanggang, Mt. Jigong, Shangjing Path and nominated place of world natural heritage of Mt. Danxia such as Bazhai, Mt. Tianluo, Mt. Shangtianlong, Sister Peak, Monk hat peak, Yangyuan Stone etc. This


programme is a part of Shaoguan government’s plan to be held every year. And it is such an influential programme that the participants includes Shaoguan district, Pearl River Delta, Hunan province, Jiangxi province etc. Owing to the opportunity of World Natural Heritage application, Mt. Danxia tourism area and Shaoguan government organized 10 thousand people signatures for application and competition of application message. These programmes take full advantage for tourism’s role of motive and guidance to call for tourists’ responsible tourism awareness and to help them choose more ecological and low-carbon tourism approach. However, there requires some improvements for Mt. Danxia. For instance, i.

In terms of energy adoption, it is suggested using more clean and recycled energy. The bus in tourism area should try to use more clean energy such as gas instead of petrol. While some clean lighting equipment such as solar energy can be choose by tourist. ii. In terms of tourism service facility in Mt. Danxia, nearby hotels can be advised to use more recycled domestic tools to reduce resource and energy consumption and pollutant emission. The materials of souvenir and commodity should use the local and environmental friendly materials. iii. Recycling the waste in the scenic spot more efficiently to avoid the pollution to original environment.

The Content of Construction of LowCarbon Software Systems in Mt Danxia •

Internal strategy: optimizing internal management of tourism area and guiding the healthy and orderly development of low carbon travel.

In order to standardize the tourism area management, formulate policies and systems as guidance, according to the characteristic of Mt danxia tourism area, «Protection Management Regulations of Mt Danxia, Guangdong Province» has been enforced since 2009, it provides the details of the reward system on environment protection of Mt Danxia. Staff are organized to learn rules and regulations from time to time, such as «World Heritage Convention», «Chinese Nature Reserve Regulations», «Scenic Area Ordinance», «Protection and Management Regulations Of Mt Danxia, Guangdong Province» to strengthen the concepts of ecological protection and raise the level of law enforcement. What’s more, it introduced the training of international quality and environment quality system into the “month of education”. It strengthens regulatory mechanism of tourism area environment, real-time management and maintenance. Specific, i) tourism area of Mt Danxia sets up special consultants and environmental monitors. In addition to provide advice about tourist routes and facilities service, it also bears responsibility for environment and resource monitoring and management; ii) It improves scientific research and monitoring facilities in tourism areas. So far tourism area has set up eight front-end video sites for investigation which includes the monitoring of geological heritage sites, meteorological monitoring sites, the environment automatic monitoring sites, forest fire monitoring sites, forest fire prevention remote video cable (wireless) monitoring system. iii) Scenic ecological civilization construction team of Shaoguan City is responsible for ecological monitoring, pollution control, ecological restoration. It clarifies strategic objectives for scenic spot’s development with strengthening cooperation between other scenic spots. On the one hand, Mt Danxia developed a new “135” high quality project to determine the overall direction of tourism area. It is trying to take advantage of World Heritage to set green ideas, to develop green economy and to create green city. It aims to develop more

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environmental theme tourism, such as science and technology tourism, forest tourism and outdoor sports. On the other hand, It started eco-tourism training of Mt Danxia, there are nearly 20 tourism areas that have established cooperation of ecological environmental protection, such as Mt Huang of Anhui, Mt Tianshan of Xinjiang, Chishui of Guizhou, Mt Lang of hunan, Mt Jianglang of Zhejiang, Mt Baiyun of Guangzhou, Mt Wutong of Shenzhen, Mt Xiqiao of foshan .Mt Danxia has established good cooperative relations with the Sehn and Yellowstone National Park of United besides domestic co-operation, management ideas and technology cooperation in environmental preservation has become the highlight of cooperation. •

External strategy: People need to promote low-carbon life and propaganda education actively so as to construct the ideology of low-carbon technology.

Firstly, it organizes all kinds of propaganda about low-carbon life and tourism environmental protection which includes: i.

The activities of trekking through Mt Danxia. This is a major event for the world after Mt Danxia was passed the field evaluation of UNESCO Group of Experts. Now the second event is also planned. It mainly focuses on the country roads, little interference free of modern transportation. It includes Huanggang Hill, Mt.Jigong, Shangjing trail and the World Natural Heritage of Mt nominated Palestinian Village, Snail Hill, sister peak, mitral peak, Yang Yuan-shih and other natural landscapes. The activities are list in Shaoguan municipal government plan as an annual event. Relevant groups are Shaoguan area, the Pearl River Delta, Hunan, Jiangxi province. ii. Getting help from the job of heritage application, Mt Danxia and Shaoguan government also organized a million signatures about it

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and contest of messages collection. These activities play an important role in Mt Danxia application, All these activities play full drive roles to promote awareness of responsible tourism ideology to guide the tourists choose a more ecological, carbon-based forms of tourism. iii. People promote tourists low carbon travel on the theme of “love Mt Danxia to protect heritage sites”, then send books and promotional materials to the visitors and call for practical action to protect low-carbon green ecological resources. What’s more, they invited Hong Kong Eco-tourism Training Centre, the Cycling and tourists association and Hong Kong Tourism Co., Ltd. to organize the first 2-day “landform bicycle tour” eco-tourism investigation with the purpose of advocating a low-carbon way to travel. Secondly, people pay attention to the establishment and population of low-carbon concept among primary school students by building close collaboration with numerous Shaoguan primary schools. For example, it organized ecological science tourism on Children’s Day for free with enhancing primary school students’ awareness of low-carbon travel, environmental and ecological protection through tourism. In addition, the cooperation with experts and universities is also important. It held 2010 tourism development forum on ecological low-carbon concept for exploring the way of Danxia’s sustainable development and forest eco-tourism in China. People invited scientific research institutes and related universities to Mt. Danxia to carry out various scientific and educational projects and to build bases, so that we can find channels for advanced eco-tourism product and low-carbon travel implementation. So far the cooperation with related departments of universities such as Sun Yat-sen University, Jinan University, and South China Normal University etc has already been built.


Furthermore, Mt. Danxia scenic spot still has promoted propaganda of low-carbon tourism among the residents. In the eve of World Earth Day, scenic spot and governmental department combined the Earth Day theme “treasuring the earth’s resources, promoting low-carbon life, changing approach to development” with the theme “Chinese Danxia Exotic Earth” to publicize on advocating local residents to save the resources and establish a low-carbon environmental awareness for contributing to protect the environment. People also have been given a series of lectures like “low-carbon life”, “low-carbon economy”, etc. by inviting a lot of experts from 706 geological Team of Guangdong Bureau of Geology, 932 geological team of Nonferrous Metals Geological Bureau of Guangdong Province and other geological divisions. In addition, they made use of the world natural heritage application events of Mt. Danxia actively to carry out activities to send the film to the countryside focusing on the world natural heritage application with the aim of helping the villagers to understand the knowledge of ecological protection related to the world natural heritage. In conclusion, though Mt. Danxia has made a lot of efforts and achieved certain effects in hardware and software design of low-carbonization, there are still some areas need to be improved. For example, in terms of energy adoption, more clean and renewable sources of energy should be used. The coach which enters tourism region should use clean energy such as natural gas instead of gasoline; on lighting devices, clean energy such as solar energy should be adopted properly. On tourism service facilities, it is necessary to call on hotels near Mt Danxia to use non-disposable supplies so as to reduce energy consumption and pollutants emission; souvenirs and merchandise should make use of the materials from local resources, more environmentally friendly materials must be adopted. On the scenic wastes, recycling must be more timely and effective to avoid contamination on the original ecosystem.

RECOMMENDATION FOR FURTHER RESEARCH Low-carbon tourism development is still in preliminary stage with vague relevant conceptions. With the improvement of low-carbon technology R&D procedure and growth of low-carbon tourism, it will offer more directions for the study of low-carbon tourism development which includes: •

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Study on low-carbon tourism development model: Continuous growth of lowcarbon tourism in different tourism areas of different district will produce various developing forms. The more trials and practice people have, the more experience they will gain. Therefore, it is the key to study on exploiting and summarizing lowcarbon tourism development model which is full of significance of theoretical system improvement and practice reference. Study on low-carbon tourism evaluation index and its system: In the process of transforming low-carbon economic notion from theory to practice in tourism sector, there is another issue needed to be solved, that is how to describe and assess present situation of low-carbon tourism development. In other words, which characteristics can represent low-carbon tourism, and how to assess present and future development degree of low-carbon tourism with these indexes. The research in this field will be the requirement for standardizing low-carbon tourism. Study on exploitation and plan for lowcarbon tourism area: As the important tangible carrier of low-carbon tourism development, tourism area’s degree of lowcarbonization will directly relate to the explanation power of low-carbon notion. Hence, what is low-carbon tourism area, how to develop and plan low-carbon tour-

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ism area is the most forward project for low-carbon tourism development. Study on Low-carbon technology application in tourism: The low-carbon tourism development always closely connects with R&D of low-carbon technology, and the development extent of low-carbon tourism somewhat depends on application degree of low-carbon technology. As the research on low-carbon technology is moving on, tourism should be aware of the progress of low-carbon technology when developing low-carbon tourism. What’s more, it should continuously innovate lowcarbon tourism development situation. Hence, the application of low-carbon new technology in tourism will be a focus for future research.

CONCLUSION Low-carbon tourism has become the tendency for tourism development and the optimal model for realizing tourism sustainability because of the acceleration of globalization trend of low-carbon economy, progress of low-carbon technology, the awakening of people’s environmental-friendly consciousness and strategic demand for tourism sustainable development. This article tries the in-depth discussion on effective combination of low-carbon economy and tourism on both level of theory and practice. Under the guidance of low-carbon economic idea, according to the characteristics of tourism, it constructs an operation framework system assumption on developing low-carbon tourism. In this framework, it starts from six elements of tourism “foods and beverages, accommodation, transportation, travel, shopping, entertainment and recreation” to propose a specific execution scheme on developing low-carbon tourism. And it selects Shenzhen OCT East National ecological tourism demonstration zone and nomination of

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World natural heritage Mt. Danxia of Guangdong province as two cases to explain their green lowcarbonize design, and proves the fact that some tourism areas have consciously been promoting low-carbon practice to further confirm the feasibility of developing low-carbon economy in tourism so as to guide the comprehensive promotion of low-carbon tourism. Even though low-carbon tourism is the inevitable trend of tourism development, the fact is that there is still a long way to realize low-carbon economy application completely in tourism. Therefore, in the process of low-carbon tourism development, haste and blind unilateral development should be avoided, and people should be consistent with relevant products of low-carbon technology, domestic and international law and regulation, the improvement of management system.

REFERENCES Bao, J., Miao, Y., & Chen, F. (2008). Low-carbon economy: New reform of human economic development way. Chinese Industrial Economy, 4, 153–160. Ding, Y. H. (2007). Respond with climate warming, China facing with challenge. Journal of China environment, 6, 14-14 . Fang, H. (2009). Profile of low-carbon economy and its development in China. Economic Perspectives, 3, 45–46. Hu, A. G. (2007). Chinese response to global warming. Report on National Situation, 29. Jia, D. C. (2009). It’s times of low-carbon economy. Consultant of Chinese Engineer, 4, 56–60. Kang, R., Yang, H. Z., & Wang, F. (2009). Study on developing low-carbon economic sector in Chongming. Sichuan Environment, 28.


Li, D. S. (2009). Low-carbon tourism enters village to lead the fashion. Retrieved from http://www.3ditour.com/ news/ mjlt/ 2009/ 9/ 099241611577786.html

Zhang, L. F. (2008). Demonstration analysis on Chinese three industrial energy consumption and saving situation. Journal of Northeast University, 10(2), 127–129.

Li, T. Y. (2006). Theory of tourism. Beijing, China: Higher Education Press.

Zhang, Y. P. (2009). Low-carbon economy and low-carbon life. Sino-Global Energy, 14(4), 13–14.

Liu, X. (2009). On low-carbon economy and tourism. Chinese Collective Economy, 5, 154–155. Wang, J. (2009). Low-carbonization: The project tourism development has to face. Journal of China Tourism, 6. Wei, P. C. (2009). Low-carbon tourism is the trend for tourism development. Retrieved from http://www.3ditour.com/ news/ mjlt/ 2009/ 8/ 098281118445553.html Zhang, K. M. (2005). China in low-carbon world: Status, challenge and strategy. Population in China- Resource and Environment, 18(3), 1-7. Zhang, K. M., Pan, J. H., & Cui, D. P. (2008). On low-carbon economy. China Environment Science press.

Zou, D. T. (2008). Blue book on development and reform (No.1)—30 years of China reform. Beijing, China: Social Science Document Press.

ADDITIONAL READING Good practices of Shenzhen OCT East national ecological demonstrative district, http://www. docin.com/ p-15414.html. Qin, J. Low-carbon tourism, having a date with Shenzhen OCT East, http://www.citygf.com/ szb/ html/ 2010-05/ 11/ content_184346253.htm.

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Chapter 27

Government Policies and Private Investments Make for a Bright Cleantech Future in India Gavin Duke Aloe Private Equity, UK Nidhi Tandon Networked Intelligence for Development, Canada

ABSTRACT Written from the perspective of private equity investment, this chapter highlights the factors needed to support clean technology development, and in particular, the importance of an enabling policy environment. Drawing from the experience of a private equity fund that seeks out environmental companies and develops them into viable international enterprises, this chapter showcases examples in India whose bottom lines include social and environmental benefits for all. Cleantech has a new resonance among law makers. International urgency on climate change issues and carbon emission reduction are converging with national government policies that seek to support clean energy, green jobs, as well as lessen industrial pollution and promote waste treatment, recycling and cleaner production. This is good news for all, including discerning green investors.

India’s Nano isn’t just a car, but also a symbol of a wave of technological innovation sweeping the country, which is helping revitalize India’s business sector even as it struggles to navigate the rocky waters of a global downturn. And at the crest of that wave is Environmental and Sustainable technology.1 DOI: 10.4018/978-1-60960-531-5.ch027

INTRODUCTION The cleantech2 sector is only at embryonic stage, but its growth, expansion and deployment could be as dramatic, universal and as radical as the Internet revolution. Its spinal cord has grown around the clean and renewable energy sector but this is only one aspect of the entire gamut of processes and


Government Policies and Private Investments Make for a Bright Cleantech Future in India

technologies that we are going to need to clean up the systemic mess that our generation has inherited and continues to create. Revolutions3 bring enduring social, political and economic change and if the effects of global warming are to be mitigated then everyone has a stake in ensuring that the cleantech sector delivers. In our lifetime, we will witness not only a discerning demand for clean energy sources, but also a sea-change in the ways that science, engineering, business innovation and public policy collaborate with each other for a more sustainable future that will affect us at home and work. The consultancy Clean Edge, in its CarbonFree Prosperity 2025 Report, identifies solar, green building design, wind, sustainable bio energy and smart grid technologies as ‘The Big Five Opportunities’ in cleantech. Runners up include wave power, geothermal and clean transportation systems4. But if in fact we need systemic cleaning up, then we will also be looking to clean up our waterways, our agriculture and food production systems, our outer space, our entire mode of living. While technology development has always evolved over time to be better, faster and cheaper, it is now going for cleaner. As the underlying assumptions of the drivers of economic growth change, we can expect to see a shift away from the big centralized grid, industrial-type technologies to smaller more mobile technologies, akin to what has happened in the electronics industry, where we have witnessed an amazing miniaturization, multi-tasking and customization of technologies. Policy change usually follows technological innovation. Germany has been leading the way in many ways, giving birth to one of the world’s more verdant green industrial heartlands. A straightforward and effective policy measure, called the Feed-in Tariff (FIT) obliges power distributors to purchase electricity from renewable sources at a fixed rate for a fixed period of time above market prices. The German FIT sets the price for green power far higher than market rates, and in the case of solar energy this had been up to seven times the

price. As a result, Germany’s renewable energy industry employed about a quarter of a million people and had brought in almost $40 billion revenue in 20075. Increasingly the attractiveness of India and China has been rapidly improving based on new renewable energy policies that subsidize clean energy production. However, in both these countries there is general shortage of energy and hence in a number of cases, the renewable energy produced is able to be meet the return sought by equity investors without excessive additional subsidies.

INDIA PAVES A WAY TO A CLEAN FUTURE India represents an exciting frontier in the cleantech sector, with small, medium and large-sized companies addressing the needs of domestic and international markets alike. The country still relies very heavily on fossil fuels to power its industrial production. This places it in the top five largest emitters of carbon dioxide in the world, while more than 400 million of its population lacks access to basic electricity. At the same time, the country is making important new strides in the clean sector, capitalizing on its own massive domestic market, a history of technology innovation and a skilled science and business-literate workforce. India offers an extremely attractive market for Environmental Technologies, Equipments and Services. The total market size was estimated at USD 5.29 billion in 2006 by the US Department of State. Since the early 1990’s the market for clean technologies has been growing at an annual rate of 15%. Indian cleantech investments are estimated to total around US$150 billion over the next ten years, according to a new HSBC6 report. The report estimates a reduction in carbon emissions by 18% over that period compared to business-asusual projections. Wind energy (in which India is already the world’s fourth largest market), hydro and solar power, biomass, biofuels, clean coal

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and energy efficiency make up the main clean energy sectors. Nick Robins, head of HSBC’s Climate Change Centre of Excellence observed that the Indian government, like that of China, “recognizes that it will be supremely affected by climate change”. He added that India had placed itself in a strong position to act by linking progress on climate change to ‘co-benefits’ in areas such as energy security and the improvement of air quality and health. The fact that “India is, relatively speaking, a low-carbon economy, and will remain so” also ensures it is well placed to benefit from a global drive to address the problem.7 Comparing and contrasting investment opportunities geographically is challenging. The Ernst & Young Renewable Energy Country Attractiveness Indices provide investors with a guide to compare renewable energy investments on a country by country basis. The index is based on the economic conditions and currency exchange rates as well as government policies that support renewable energy. Although there is variance quarter by quarter the overall trend is that from 2005 to 2009 both India and China have become more favorable locations for renewable energy investments.

FROM A PRIVATE EQUITY PERSPECTIVE… Private Equity has an especially important role to play in identifying (and incentivizing) feasible cutting edge technology, creating viable companies with innovative business models to commercialize the technology and then driving those companies to deploy the technology globally. The breadth of the cleantech sector limits the usefulness of generalizations; however some commonly observed characteristics include: •

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Cleantech is a knowledge-intensive sector - typically requiring significant interdis-

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ciplinary knowledge of scientific and engineering principles, including chemistry, materials science, mechanical and electrical engineering, biotechnology, environmental sciences and IT; Cleantech endeavors typically take time to get to market, sometimes more than 10 years. This implies a need for sustained research funds for prototype development. Clean technologies have to be proved to be safe and reliable via effective demonstration prior to widespread deployment and investment. Also some clean technologies have defined sales cycles. For example an investor will generally require a year’s worth of wind speed data before commencing construction of a wind farm. Compared to the speed of the Dot.com era when the internet was the sales route and converting web hits into sales was paramount, this sector has a much longer gestation period; Cleantech deployment requires integration with the prevailing industrial infrastructure such as pipelines, electricity grids and road networks or with existing domestic infrastructure such as housing, central heating, air conditioning and transportation. This means that clean tech companies have to consider how their innovations “plug in to” the established picture; The capital intensive nature of clean technologies also means that they are especially affected by both government regulations and by public perception.8 By extension, private equity investors will only commit to million dollar investments when there is political and economic stability and clear policy frameworks to deal with issues such as intellectual property rights (IPRs).

Private equity backed-companies push the envelope whilst working within existing legal and policy frameworks. They can also influence and shape the next generation of frameworks that


support further expansion and commercialization of clean technologies. Aloe Private Equity (www.aloe-group.com) manages a number of Environment Funds that is dedicated exclusively to investing in businesses that can make a positive contribution to society, both socially and environmentally whilst simultaneously providing significant financial returns to its investors. The relationship is strategic, in the sense that Aloe invests in companies with proven products or solutions that benefit from Aloe’s expertise in the international expansion of environmental businesses into the developing countries with a particular focus on Asia. Two examples of recent investments made in India are discussed below: Greenko Group and Polygenta.

Greenko Group plc, Indian Clean Energy From a standing start in February 2006, Greenko Group plc (www.greenkogroup.com) has developed in excess of 159MW of operating renewable energy capacity and has licenses for an additional 421MW of secured clean energy generating capacity in India, generating enough energy each year for over 4.5 million local people. Its sources of clean energy are primarily from biomass & run of the river hydro projects spread across the entire country. Indian government policy was one of many risks that Aloe Private Equity had to understand, analyze and assess before proceeding with its initial investment. These policy risks were evaluated at three levels, company, country and internationally. At the company level, Greenko must comply with Indian laws - this includes everything from Health & Safety work practices to environmental policies. Government policy also influences the permitting procedures for the development of new renewable energy facilities. Through local knowledge and experience Aloe was able to evaluate Greenko’s development pipeline in terms of duration and likely success rates under these Indian

legal requirements. In Greenko’s favour, it utilizes tried and tested renewable energy solutions thus reducing the technical risks and by purchasing off-the-shelf components from local suppliers Greenko is not exposed to IPR risks. At the country level it was necessary for Aloe to understand the demand and supply of electricity within India and form a view on the direction of future Indian Government policies so that Greenko would be in a position to capitalize on these new policy driven opportunities. When assessing market demand Aloe utilizes forecasts from a variety of sources including the International Energy Agency and cross references them against anecdotal evidence. This includes factors such as: •

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Growth predictions, although the current financial crisis has led economists to reduce their 2009 GDP growth forecast for India to 7.7%, the Indian economy is still growing and is therefore expected to consume more energy after compensating for improving electrical efficiencies; Estimates from the Indian Ministry of Power indicate that 44% of Indian households were still without electricity in 2006 (i.e. there is still unmet demand). Energy shortages within India are expected to continue until at least 2015 when the first of the large 4000MW coal fired power plants are due to come-online; India has lower per capita power consumption than other comparable economies.

The modeling of this evidence provides valuable risk management insights into the increasing market demand in India and the positive direction of Government policies. On the supply side, the Indian government has specified renewable energy targets and subsidies to help achieve these targets. Recently the Ministry of New & Renewable Energy (MNRE) announced a new wind incentive of $0.01/kWh.

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At the international level, trade in Certified Emissions Reduction certificates (CERs) is an additional revenue stream for Greenko. In addition to fixed feed in tariffs, CERs represent another economic advantage for the sustainable deployment of renewable energy in countries covered by the Clean Development Mechanism (CDM) 9. The generation of 1MWh of electricity from renewables sources saves 1MWh of electricity being generated from fossil fuels; this corresponds to an amount of carbon dioxide that has been saved from entering the atmosphere. This carbon dioxide saving is traded international as CERs. Aloe analyzed the market for CERs to assess the value of this revenue stream for Greenko. The additional advantage of proven technology is that the reduction in carbon is also proven. Although individual plants still require inspection and constant monitoring to create CERs, it is not necessary to apply for a new process and thus delay a vital revenue stream. In summary companies operating in India have to comply with Indian laws hence local knowledge and experience is necessary for an investor to understand and mitigate the domestic policy risks. On an equally important macroeconomic scale, investors have to gauge the potential of instruments such as CERs to understand and mitigate the international trade policy risks. In assessing Greenko’s technology and marketability, intimate knowledge of the Indian electricity market and the management of electricity price risks were critical.

Polygenta: Propriety Polyester Recycling Aloe Private Equity invested in Polygenta (www. polygenta.com) in December 2007, facilitating the licensing of the ReNEW™ process10 and re-structuring the company to focus on recycling. Aloe Private Equity has invested in several companies in the waste recycling sector of clean tech which requires specialist knowledge and understanding of a range of economic drivers including waste

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legislation, landfill taxes and raw material prices. Each type of waste is differentiated from another, and the plethora of sub-sectors has a different set of economic drivers and policies. Metals for instance are sub-divided into steel, copper, zinc etc., paper and cardboard are further sub-divided, as is organic waste. At the international trade level the proximity principle applies. In the case of Polygenta the waste polyester and plastic bottles need to be recycled as close as possible to source of the waste production. Almost every country in the world produces plastic bottle waste however with Aloe Private Equity’s assistance the decision was taken to locate the first recycling site in India to minimize risk. Location is paramount in the waste recycling sector since transportation costs can drain the profit from investments; a poorly sited facility could suffer from increased feedstock supply costs and increased product distribution costs. Local market knowledge combined with thorough financial modeling is necessary to understand the tradeoffs between locating close to the supply of waste or close to the customers. The decision to locate the first manufacturing plant employing the ReNew™ process in India offered a compelling win-win solution, with a population of 1148 million growing at 1.58% per year there will be no shortage of used plastic bottle feedstock. In addition the ReNew™ product is a recycled polyester yarn suitable for the $22 billion11 Indian textiles market. In summary, Aloe Private Equity’s policy risk mitigation strategy was to use the domestic polyester market to promote the latent polyester recycling industry in India and thus successfully commercialize Polygenta’s waste recycling technology. Once the ReNew™ process has been proven in India through 2011, the technology will be rolled out globally in 2012.


PROGRESSIVE POLICES IN A CLIMATE CHANGE CONTEXT Affordable energy is quite literally the fuel for development and poverty reduction. Paradoxically, affordable energy – in the forms it is currently available – is also fuel to the fire of climate change. A deal on technology transfer, to make low-carbon and carbon-free energy accessible to developing countries, is therefore one of the most critical pieces of a new global agreement on climate12. Investors are constantly making deals and there are multiple facets to every deal, hence the phrase “deal on technology transfer” should be interpreted in the widest possible sense. From an investor’s point of view it is the economics that are limiting the growth in low carbon energy throughout the world. Today’s reality is that clean energy is more expensive than traditional energy sources - which is why government policies and subsidies for clean energy are critical. The reasons that traditional energy sources cost less includes the approximately 100 years of innovation and incremental improvements that have improved the efficiency of traditional sources compared to the approximately 25 years of developments for wind and solar. For clean energy to “catch up”, governments need to continue to favour clean energy with research, design and demonstration grants. Traditional energy sources do not account for the cost of their environmental emissions, a followon deal to the Kyoto Protocol will be needed to establish a longer term, 25 years plus, mechanism for pricing carbon. This deal along with effective demonstration of the technology could form the basis for a Carbon Capture and Storage industry and entice investors to make more deals with enhanced environmental implications. In India, the various states are taking their leadership role in climate strategy seriously. Solar power “is attracting a lot of industrial interest [and is triggering] something of a race between state

governments to develop it”13. The government is also considering launching a system of tradable certificates for industrial energy efficiency where companies would be set minimum efficiency targets: those who met them would be able to ‘sell’ their ‘efficiency surplus’ to others who were less well advanced. In June 2008, the Indian Government set up its National Action Plan on Climate Change setting out a series of ‘themes’ on everything from solar energy and energy efficiency to ecosystem protection. Initiatives are starting to flow thick and fast as a new generation of ‘pro-cleantech’ politicians such as Vilas Muttemwar, the Indian ex-minister for new and renewable energy, announced plans for the nation. At the Cleantech India Forum in October 2008, Muttemwar talked about a major expansion of solar power capacity by 2020, to provide electricity to 20 million ‘off-grid’ rural households and build 20 million square metres of green buildings. The ministry is currently working on a draft renewable energy law that would stipulate that up to 25% of electricity must come from renewables by 2020 –which would bring India into line with, or even ahead of, European targets. Meanwhile, a dedicated Special Economic Zone for renewable energy manufacturing is being planned for the city of Nagpur. The zone would focus on strategically important input materials, process and test equipment, devices and systems components which would help support the overall development of this sector. Other policy measures include rationalizing the customs and excise duty structure, liberalizing project import norms, and providing income tax concessions and concessional financing14. The combination of these policies and the overall economic viability of the nation as a whole provides for self perpetuating and sustainable growth with investors like Aloe Private Equity providing capital where needed.

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CONCLUSION: THE FUTURE IS HERE Just as entire segments of the global population have ‘leapfrogged’ from no land line connectivity at all to wireless handheld cell phones, it is hoped that vast segments of the global population who still have no access to electricity will soon find that their choice source of energy will be both affordable and clean. This gives us much cause for optimism. Our governments’ progressive policies will become the policies that the next generations will inherit and we should take care not to make our own systemic errors in the process. Whilst policies that support renewable energy are an easy sell to voters and generate popular sound bites, comprehensive and integrated energy policies are needed. Renewables are but a minority constituent of the global energy mix therefore government policies that are directed at all forms of energy will be a more effective tool for combating climate change comprehensively. Local policies and deliberate support for local action is key - while keeping an eye on the global context. The cutting edge of cleantech research is fluid and not geographically fixed. Whilst there are clusters of expertise, the global nature of the climate change challenge means that pockets of research are occurring, or could be developed, throughout every country in the world. We are witnessing a change almost overnight where technological innovations and applications are being generated in the South in response to the kinds of research grants and other financial incentives currently available worldwide, and are no longer dependent on the big laboratory companies of the West. In practical terms the Kyoto Protocol has, for all its shortcomings, encouraged and fostered the deployment of renewable energy technologies in developing countries and as such, is a positive first step in the right direction. Within its portfolio companies, Aloe Private Equity supports the celebration of small wins as this

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promotes momentum for further improvements. A post Kyoto Protocol agreement can build on the original global climate change policy to continue and potentially accelerate sustainable development. Whilst there are numerous proposals for policy enhancements from an investor’s point of view, what is really key to a sector that requires large investment and long 25-year timeframes is both continuity and stability. In other words there needs to be a seamless transition from the Kyoto Protocol to the post 2012 arrangements to prevent any slowdown in the financing of Clean Development Mechanism projects.

ACKNOWLEDGMENT The authors wish to acknowledge and thank Mahesh Kolli and Anil Chalamalasetty of the Greenko Group as well as Subodh Maskara and Vivek Tandon, promoters of Polygenta for their support and time in preparing this chapter. Aloe Private Equity manages a number of Environment Funds which invest in companies that can make a positive contribution to society, both socially and environmentally whilst simultaneously providing high financial returns to its investors. Aloe Private Equity have a particular interest in companies who have proven products or solutions who wish to leverage their expertise in growing businesses in Greater China and India. www.aloe-group.com

REFERENCES Asia-Pacific Partnership on Clean Development and Climate (APP) Renewable Energy and Distributed Generation Task Force. (REDGTF). (2008). Pursuing clean energy business in India. Cleantechnology Australasia 2008. http://www. cleantechnology.com.au/ pdf/ reports/ Asia% 20Pacific% 20Partnership% 20report% 20Cleantech% 20AustralAsia.pdf


Business Standard reporters. (2009). Indian textile industry should grab China’s market share. Business Standard. Retrieved from http://www. businessstandard.com/ india/ storypage.php? autono=350870

Pomianek, M. (2008). Inside IP law energy, clean tech and IP: Protecting innovation. Mass High Tech. Retrieved from http://www.masshightech. com/ stories/ 2008/ 09/ 29/ focus2-Energy-cleantech-and-I P-Protecting- innovation.html

Climate Check. (2008) ClimatePULSE–ISO 14064 for clean technologies and carbon markets. Retrieved from http://www.triplepundit.com/ pages/ climatepulse-is.php

Robbins, N., Singh, C., & Kaushik, S. (2008). Wide spectrum of choices: India’s climate investment opportunities revealed. HSBC Global Research.

Confederation of Indian Industry. (2007). Cleantech solutions for sustainable development–meeting the challenges and capitalizing on opportunities (p. 71). Retrieved from http:// www.sustainabledevelopment. in/ events/ pdf/ theme_cleantech.pdf Cooper, D., & Gujral, G. (2009). Cleantech 2009–the year ahead. Ambrian Partners Limited.

Turner, C. (2009). Feed-in frenzy: A simple tariff has transformed Germany’s green energy economy. Why isn’t Canada following suit? The Walrus, 6(1).

ENDNOTES 1.

Ernst & Young. (2008). Renewable energy country attractiveness indices. Goodman, R. (2008). A sunny outlook for clean tech. Sandfire Securities Inc. Retrieved from http://www.sandfiresecurities.com/ downloadable/ clean_tech_article.pdf

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Herz, S. (2010). A clean solution: Tackling climate change and sustainable development through clean technology. Action Aid International Secretariat. Retrieved from http://www.actionaid.org/ assets/ pdf/ Clean_Solution_final.pdf Mehra, M., & Wright, M. (2009). India’s green horizons. Forum for the Future. Retrieved from http://www.forumforthefuture.org/ greenfutures/ articles/ Indias_Green_Horizon Mitchell, R. (2009). The 2009 OCETA SDTC Cleantech growth and go-to-market report. Retrieved from http://www.russell-mitchell.com/ pdfs/ CTR_Report09_Lowres_Feb 11.pdf

http://www.forumforthefuture.org/greenfutures/articles/Indias_Green_Horizon 21st January 2009 Malini Mehra and Martin Wright. Clean technology refers to any product, service, or process that delivers value using limited or zero nonrenewable resources and/or creates significantly less waste than conventional offerings. Areas of focus of the Clean Technology sector include energy, water, agriculture, transportation, and manufacturing where the technology creates less waste or toxicity. http://www.sustainabledevelopment.in/events/pdf/theme_cleantech. pdf. Previous transition phases included: the industrial revolution; the age of steam and railways; the age of steel, electricity and engineering; the age of oil, automobiles and mass production; and the age of information and telecommunications - Dean Cooper and Gurpreet Gujral: “Cleantech 2009 – The Year Ahead” Ambrian Partners Limited. A Sunny Outlook for Clean Tech, Richard Goodman, Sandfire Securities Inc., Toronto

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http://www.sandfiresecurities.com/downloadable/clean_tech_article.pdf. Chris Turner: “Feed-in Frenzy: A simple tariff has transformed Germany’s green energy economy. Why isn’t Canada following suit? In The Walrus, Volume 6 Issue 1 January/ February 2009. HSBC report “Wide Spectrum of Choices”. HSBC report “Wide Spectrum of Choices”. October 3, 2008 Michael Pomianek Inside IP Law Energy, clean tech and IP: Protecting innovation http://www.masshightech.com/ stories/2008/09/29/focus2-Energy-cleantech-and-IP-Protecting-innovation.html. The CDM allows emission-reduction (or emission removal) projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one

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tonne of CO2. These CERs can be traded, sold and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol. http://cdm. unfccc.int/about/index.html. ReNEW™ process for the chemical recycling of post consumer waste PET bottles, which is viable without subsidies and able to recycle both clear and coloured bottles http://www.business-standard.com/india/ storypage.php?autono=350870. Steve Herz, A Clean Solution: Tackling Climate Change and Sustainable Development Through Clean Technology, Action Aid International Secretariat http://www.actionaid. org/assets/pdf/Clean_Solution_final.pdf. HSBC report “Wide Spectrum of Choices”. HSBC report “Wide Spectrum of Choices”.

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Chapter 28

Building a Sustainable Regional Eco System for Green Technologies:

Case of Cellulosic Ethanol in Oregon Bob Greenlee Cascade Microtech, USA Tugrul Daim Portland State University, USA

ABSTRACT Increasing gasoline prices, concerns about energy security, and the effect of greenhouse gases on global warming are driving demand for alternative fuels such as ethanol and biodiesel. In the United States, corn is the major source of fuel ethanol, but there are disadvantages to using crops for fuel, including increasing costs and competition with food sources. Cellulosic biomass, including agricultural waste, forestry residues, and municipal waste, offers several potential advantages as a source of ethanol, and a great deal of effort is going into the development of processes capable of converting these feedstocks into fuel. This chapter begins with a brief overview of the environmental and policy drivers for cellulosic ethanol, and a description of the basic technology behind it. It then outlines a simple methodology for selecting the three primary components of a sustainable supply chain in the Pacific Northwest: feedstock, process, and distribution method. Using a weighted rating scale, the authors evaluate the alternatives for feedstocks, conversion processes, and distribution methods, and make some recommendations for an Oregon-based facility. These results are compared with the approach chosen by a new cellulosic ethanol startup, Pacific Ethanol, currently under construction in Boardman, Oregon. Although Pacific Ethanol’s choices help confirm the model, the model also provides valuable information for other potential ethanol production companies based in the Pacific Northwest. DOI: 10.4018/978-1-60960-531-5.ch028


Building a Sustainable Regional Eco System for Green Technologies

BACKGROUND / LITERATURE REVIEW Environmental Issues Many researchers have found that non-renewable energy resources, such as oil and natural gas, are nearing depletion due to increasing human use. The most valuable non-renewable source of energy is fossil fuels. Its price affects the entire global economy due to production instability and lack of consistant oil pricing. By comparison, renewable energy resources are able to support human energy needs without depletion. Although renewable energy resources are currently unable to completely displace all of our non-renewable energy use, many scientists are making advancements in renewable energy technology. It can be hoped that in time, science will enable the complete substitution of non-renewable energy resources for fossil fuels (McKinney and Schoch, 2003). Fossil fuels are created by the decomposition of living organisms. These can be separated into three types: coal, natural gas and oil. Coal is a solid fossil fuel created by the decomposition of land vegetation. When compared with other fossil fuels, coal is quite abundant and easily recovered in many locations. Many developing countries depend on coal for energy because they cannot afford other fossil fuels. India and China are the main consumers of coal. Natural gas is a vaporous fossil fuel that is abundant, useful and relatively clean compared to other fossil fuels. It is formed from the remains of marine microorganisms. Natural gas is used in many developed countries. Oil, a liquid fossil fuel, is the most widely used and valuable fossil fuel. It is also created from the remains of marine microorganisms deposited on the sea floor. Crude oil is refined and used for fuel in cars and other forms of transportation. Oil is not available everywhere on earth, but is found only in specific areas. Consequently, it is a powerful energy source that influences the world economy

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through fluctuations in price, supply and demand (BBC Weather Centre, n.d.). Energy is extracted through the process of burning fossil fuel (combustion) and then converted to other forms of the energy such as heat and electricity. Carbon (C) and Hydrogen (H) react during the combustion process to form Carbon Dioxide (CO2). Heat is released during this process. The release of CO2 and heat into the atmosphere is a major contributor to the Greenhouse effect and global climate change, both of which are now an increasing concern throughout the world.

What is the Greenhouse Effect? The sun heats the earth by radiating solar rays. Some of these rays are absorbed by greenhouse gases, such as CO2, that are created by burning fossil fuel. These greenhouse gases cause the earth’s temperature to rise, causing global climate change. Effects include increases in the average air and ocean temperatures, widespread melting of polar icecaps, and a rising sea level. The heating effect caused by the production of too many greenhouse gases, is known as “Global Warming.” (BBC Weather Centre, n.d.) (Intergovernmental Panel of Climate Change, n.d.). Consequently, the burning of fossil fuels is one of the most critical problems the world is currently facing. In the United States, more than 90% of greenhouse gas emissions come from the burning of fossil fuels. This is one of the major reasons for supporting the use of renewable alternative energy sources, such as cellulosic ethanol. Research shows that ethanol burns cleaner and produces less carbon dioxide (CO2) then gasoline. M. LaMonica in the NRDC study states that “making ethanol from the cellulose in agricultural and forestry waste produces less greenhouse gases than consuming gasoline from refining.” (Wikipedia, 2008a). According to this study, ethanol can reduce the greenhouse gas emissions between twenty and eighty percent depending on the feedstock used to produce it.


According to the U.S. Department of Energy, ethanol produced from cellulose can reduce greenhouse gas emission by ninety percent, when compared with gasoline. That is in comparison to corn-based ethanol that decreases emissions by only ten to twenty percent (ODA Measurement Standards Division, n.d.). Cellulosic ethanol contributes little to the greenhouse effect and has five times better net energy balance than corn-based ethanol. When cellulosic ethanol is used as a fuel, it releases less sulfur and carbon monoxide particulates. Cellulosic ethanol has the potential to considerably reduce our consumption of fossil fuel and the production of greenhouse gases. Even though global warming is already a problem, it may not be too late to curb the impact (ODA Measurement Standards Division, n.d.). Another report from the U.S. Environmental Agency states that the increased use of alternative fuels can result in significant reductions in the use of petroleum-based fuels. Their research emphasizes the impacts of increased use of alternative fuels on greenhouse gas emission by accounting for the entire life cycle, which includes fossil fuel extraction, production, and combustion (Office of Transportation and Air Quality, 2007). Their conclusion is that greenhouse gas emissions can alter depending on each of the factors that produced the gas. For example, when gasoline is replaced by corn ethanol, the total life cycle greenhouse gas emissions that are generated from gasoline decrease by 21.8 percent. (These include not only carbon dioxide but also methane and nitrous oxides). Cellulosic ethanol, ethanol made from cellulose feedstocks such as corn stover and switchgrass, is the best alternative fuel for reducing greenhouse gas emissions (Office of Transportation and Air Quality, 2007). Another advantage of generating ethanol from cellulose is that it saves agricultural land. Compared with corn ethanol, which requires crop lands to grow corn, cellulose can be grown in all areas of the world on many different types of marginal land (Wikipedia, 2008a).

Energy Security The U.S. government plans to strengthen America’s energy security by using many different strategies including: • • •

Stepping up domestic oil production in environmentally sensitive ways. Doubling the current capacity of the Strategic Petroleum Reserve. Diversifying America’s energy supply (White House Office of the Press Secretary, 2007b).

Stepping up Domestic Oil Production in Environmentally Sensitive Ways The U.S. government will continue support for congressional action to allow environmentally responsible oil and gas exploration in a small area of the Arctic National Wildlife Refuge located in northern Alaska. They believe that it may be possible to discover more than 1 million barrels of oil per day which would also be a good natural gas resource for the future (White House Office of the Press Secretary, 2007b).

Doubling Current Capacity of the Strategic Petroleum Reserve According to information from the Department of Energy, at present the strategic petroleum reserve (SPR) is currently at around 691 million barrels and, due to increasing consumption, it is predicted that it represents only 55 days of net oil imports. The U.S. government plans to double the current capacity of the SPR to 1.5 billion barrels by 2027. The SPR’s purpose is to provide reserve oil for emergency situations such as a natural disaster, terrorist attack, or war (White House Office of the Press Secretary, 2007a). Doubling the SPR alone will provide approximately 97 days of net oil import protection and enhance America’s ability to respond to potential oil disruptions.

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Diversify America’s Energy Supply The U.S. government believes in scientists’ ability to invent technology that will help the nation reduce its oil dependency and protect our environment. Increasing renewable and alternative fuels used in automobiles from 3 percent in 2006 to at least 15 percent in 2017 can give drivers a built-in defense against supply disruption and rising gasoline prices. Furthermore, the U.S. government supports research and development into new alternative vehicle called Flexible-fuel vehicles (White House Office of the Press Secretary, 2007b).

What is a Flexible-Fuel Vehicle? A flexible-fuel vehicle, also called an FFV or dual-fuel vehicle, is specially designed to run on gasoline mixed with varying levels of ethanol. At present, FFVs feature specially-designed components that let a vehicle use a mixture of gasoline and ethanol that can vary from 0 percent ethanol up to 85 percent of ethanol (E85). In the United State, over 6 million flexible-fuel vehicles are currently on the road in almost all 50 states. These vehicles are available in a range of models, including sedans, pick-up trucks, and minivans (Wikipedia, 2008b).

President Bush’s 20 in 10 Initiative “Twenty in Ten” is the challenging goal of cutting U.S. consumption of gasoline by 20 percent in the next 10 years through improved vehicle fuel economy and increased use of alternative fuels, thereby decreasing greenhouse gas emissions and increasing energy security. To reach the goal of the Twenty in Ten Initiative, President Bush proposed the following:

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I. A Thirty-Five Billion Gallon Renewable Fuel Standard by 2017 The President’s proposal is to increase the supply of renewable and alternative fuels by setting a mandatory fuels standard to require 35 billion gallons of renewable and other alternative fuels in 2017. This increased fuel standard generates a huge incentive for private investment into alternative fuels. This will encourage improvement of crop yields, optimization of crops and cellulosic materials, and cost reduction in the production of cellulosic ethanol and other alternative fuels (Green Car Congress, 2007).

II. Reforming and Modernizing Corporate Average Fuel Economy (CAFE) Standards for Cars and Extending the Current Light Truck Rule. The President’s proposal is to reform and modernize fuel economy standards to improve cars energy efficiency. The government suggests that the result of this plan will reduce projected annual gasoline use by up to 8.5 billion gallons in 2017 (Green Car Congress, 2007).

Adoption and Market Current Ethanol Fuel Market The demands of an international market for crop-based fuels are rapidly growing. Most nations have realized that renewable and alternative fuels provide many benefits to both the environment and economy. Many countries such as The United State, Brazil, China and the European Union, expect to reduce their petroleum import and consumption, especially for transportation (Osava, 2007). Brazil produces ethanol from sugar cane and provides around 22 percent of the ethanol used nationwide, which includes a hundred percent of the hydrous ethanol requirements for four million


cars. Presently, ethanol consumption by Brazilian cars is as pure ethanol and gasohol, a mixture of ethanol and gasoline, which can reduce oil consumption by 12 percent. However, all the ethanol produced is still not enough to replace domestic oil consumption in Brazil. In 2005, Brazil consumed 2 million barrels of oil per day compared with 280,000 barrels of ethanol produced each day (Thurmond, n.d.). Dr. William Thurmond, author of “Ethanol 2020: A Global Market Survey”, stated his perspective “The global market for ethanol faces enormous opportunities and transitional challenges over the next ten years. A few issues hold the key to understanding the transitional nature of these challenges and identifying the best prospects for long-term growth opportunities.” (Thurmond, n.d.). Dr. Thurmond identified three market-based transitional generations of bio-fuel and ethanol emerging at present. The first generation is based on traditional domestic production – normally grown and sold near geographically agricultural areas. In this generation, the producers don’t receive many subsidies or commercial privileges from the government. The production of ethanol is limited to remote areas by local producers who produce ethanol and used it locally for agriculture (Thurmond, n.d.). The second generation, according to Thurmond, is based on the emerging transition of ethanol production facilities from the traditional agricultural areas to new areas in coastal regions in order to take advantage of import, export, multifeedstock and refinery co-location advantages. This generation is also identified by the rapidlychanging globalization of the ethanol trade and leading competitive imported ethanol fuel to the domestic market (Thurmond, n.d.). The third generation is the transition emerging from technologies and production processes such as cellulosic ethanol and bio-diesel. The goal of this generation is to effectively produce renewable fuels for lower cost.

Comparison of Consumption of Ethanol and Gasoline The Table 1 summarizes the advantages and disadvantages of ethanol and gasoline (Caldwell, n.d.).

The Emerging Technology of Cellulosic Ethanol Benefits of Cellulosic Ethanol over Other Biofuels Given the fact that we know how to produce ethanol from sugar and corn, and given the availability of vegetable oils such as canola and soy bean oils that can either be burned directly or converted to biodiesel, what advantage is there in trying to turn a recalcitrant material like wood or grass into cellulosic ethanol? There are several answers to this question. By looking at the economics of using food crops to make alternative fuels, as well as the net energy gained from the fuel after the fossil fuel required to grow and process it have been taken into account, a case can be made that corn ethanol and biodiesel are not the best way to create energy from biomass. And when the environmental impact of these biofuels is examined more closely (particularly their significance in reducing green house gases), alternatives such as cellulosic ethanol made from agricultural and forestry residues begin to look more attractive (Bourne, 2007). Corn Ethanol Even though corn ethanol has paved the way for other biofuels in the United States, and even though the legislative push for it as an additive in gasoline has been a boon to American corn farmers, corn has always been first and foremost a foodstuff for people and animals. By introducing another competitive market for corn, the price of this commodity has started to climb, increasing production costs for ethanol producers and the costs for cattle ranchers (Bourne, 2007).

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Table 1. Energy

Advantages

Disadvantages

Consumption of Ethanol

• Positive Environmental Impacts: Life Cycle Analysis. • Renewable Energy that can replace oil. • High octane content gives particular value to consumers using high performance engines. • Not as toxic as MTBE and lead. • A soluble deposit-controller, removing impurities in the fuel system. • An anti-icier, prevents fuel-lines from freezing in the winter.

• The energy value of ethanol is lower than gasoline • Takes more to drive the same distance. • Pay more for ethanol fuel, more frequently. • Adaptation of a non flex-fuel vehicle may cost as much as $1,200 dollars. • Not widely available. • Easily absorbs water.

Consumption of Gasoline

• More energy density than ethanol. • Abundance of gas stations. • Pay less for annual maintenance.

• A non-renewable energy • Much more mature process for production than ethanol.

Pollutants

Advantages

Disadvantages


• Reduces greenhouse gas emissions that caused the climate change. • Resolve local air pollution • Far cleaner combustion than gasoline. • Reduces exhaust emissions.


• Incomplete combustion, thus increasing greenhouse gas emissions. • Increases air pollution.

Economics

Advantages

Disadvantages


• Potentially replace crude oil, which is a finite nonrenewable resource. • Can be domestically produced, so reduces dependency on oil imports. • Possible to cut oil import costs. • Increase value added and price of agricultural products. • Creates more jobs in the rural areas. • Strength rural economies.

• Higher price to produce. • Not enough for domestic consumption. • Lack of raw materials. • Need more knowledge to produce more efficiently.


• Active investment for oil companies. • Motivates the world economy. • Advantage for the oil producing countries.

• Unstable oil pricing, depending on the world economy. • Oil producing countries can negotiate unfairly for trading.

It also takes a lot of energy to convert corn into ethanol—nearly as much as the energy contained in the ethanol produced. The ratio of energy output to input is only about 1.3, after taking into account the nitrogen fertilizer (made from petroleum), the use of diesel-powered farm machinery to harvest the corn, and the natural gas required to make steam for distillation. Given the large investment of fossil fuel required to make corn ethanol, the reduction in green house gas emissions over gasoline is only around 22% (Bourne, 2007).

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Biodiesel Biodiesel made from canola, soybean, or other vegetable oils suffers from similar limitations as corn, in that these energy crops can also be food crops, and they are typically grown on land that can also be used to grow other, potentially more valuable, crops. As an example of the market instability this creates for biodiesel producers, when wheat prices recently soared, farmers who had previously planted soy or canola for biodiesel turned instead to planting wheat, increasing the cost of feedstock for biodiesel plants. For this reason, and because


the cost of the chemicals required to produce it, the cost of biodiesel is relatively high compared with corn ethanol, gasoline, and standard diesel fuel (Bourne, 2007). It takes less energy to convert canola oil into biodiesel than it does to make corn into ethanol. The process is a fairly straightforward, and does not require distillation, so the ratio of energy output to fossil fuel energy input is around 2.5, nearly twice that of corn ethanol. Because it uses less fossil fuel in its production, biodiesel also reduces greenhouse gas emissions by 68% over an equivalent quantity of standard diesel fuel (Bourne, 2007). Cane Ethanol Cane ethanol made from cane sugar grown primarily in Brazil is an example of a foodstuff turned to fuel that appears to be working, at least in Brazil. Even though it has its drawbacks, 85% of the cars sold in Brazil are flex-fuel vehicles, and the pump price of alcohol is lower than the price of gasoline (Bourne, 2007). Sugar cane stalks are about 20% sugar, which can be directly fermented to produce alcohol, unlike corn which requires enzymes to convert the corn starch into sugar before it can be fermented. The leftover waste material from the cane (called “bagasse”) can be burned to produce the energy needed for distillation, reducing the need for natural gas or other fossil fuels. By efficient use of the entire sugar cane plant, the energy of the ethanol produced is nearly eight times the fossilfuel energy required to make it. The reduction in green house gases compared with an equivalent amount of gasoline is about 56% (Bourne, 2007). The story of cane ethanol is not all positive, however. Most cane in Brazil is cut by hand, work that is “hot, dirty, and backbreaking” according to a recent National Geographic article (Bourne, 2007). Other concerns with cane ethanol production are that expansion of the cane sugar plantations will contribute to deforestation, the burning of the cane will contribute to air pollution, and

that the increased demand for laborers will lead to exploitation (Bourne, 2007). Cellulosic Ethanol By contrast, cellulosic ethanol can be made from agricultural residues, forestry wastes, municipal solid waste, and prairie grasses such as switch grass, grown on marginal land. Although reducing the current cost of enzymes for converting cellulose to sugar is a key to this technology’s success (Allen, 2006), there is a great deal of research and money being invested in ways to cut those costs, and they are projected to decrease by an order of magnitude (Lynd, 1996). The sources of cellulose are numerous, and many are relatively inexpensive. In addition to agricultural residues, forestry waste, and energy crops like poplar and switchgrass, municipal waste (grass clippings, prunings, and the like) can actually be an income-producing feedstock, in that tipping fees are generally charged for their disposal (Graf and Koehler, 2000). The energy in cellulosic ethanol can be anywhere from 2 to 36 times the fossil fuel required to produce it—the ratio largely depends on the source of the feedstock and the methods used to convert it to ethanol. If the unused portions of the biomass, such as lignin, are used to produce the heat and power needed for the rest of the process, the energy balance can be improved. The reduction in greenhouse gases is simililarly dramatic for cellulosic ethanol, potentially creating 91% less than a comparable amount of gasoline (Bourne, 2007). Given that it is “very likely” that human-caused greenhouse gas emissions have been the primary cause of recent observed global warming trends (Solomon et al., 2007), there is an increasing sense of urgency for developing alternatives to fossil fuels. It should be noted that not all experts agree with these optimistic numbers for cellulosic ethanol. David Pimental, for example, has argued that when the complete fossil fuel usage is taken into account (including fuel usage by the workforce, energy required to make the capital equipment,

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etc.), the actual amount of energy derived from cellulosic ethanol is less than the fossil fuels required to produce it (Pimental, 2003). On the other hand, studies performed by Argonne National Laboratory suggest the following benefits from cellulosic ethanol production: use of a 10% mix with gasoline (E10) achieves a 6% reduction in petroleum use, 6–9% reduction in greenhouse gas emissions, and 6–7% reduction in fossil energy use. Use of an 85% mix with gasoline (E85) achieves a 70-71% reduction in petroleum use, 68–102% reduction in greenhouse gas emissions, and 70-79% reduction in fossil energy use (Wang et al., 1999).

Description of the Science behind Cellulosic Ethanol The science and technology behind making ethanol from starchy plants like corn and potatos, and sugary plants like grapes is at least as old as the production of wine from grapes or moonshine from corn. Naturally occurring starches and sugars, found in corn, cane sugar, beets, grapes and many other fruits and vegetables are readily converted to alcohol for use as fuel. Cellulose is another naturally occurring source of carbohydrate which, along with lignin, comprises the bulk of the structural material found in plants. Cellulose is a polysaccharide—it is made up of sugar molecules linked together to form long chains or polymers (see Figure 3), and cannot be directly fermented with yeast to form alcohol. The chemical bonds that join each of the sugar molecules together must first be broken in order for the enzymes in yeast to work on it (Probstein and Hicks, 2006). That’s good news if you are a tree, since the resistance of cellulose to degradation gives wood much of its strength and durability. Fortunately for termites and those of us who want to use cellulose to make fuel alcohol, certain enzymes, called cellulase enzymes, are capable of breaking apart the cellulose sugar chains. We humans do not produce these enzymes in our

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bodies, and so cannot live on wood or grass, but cows and other ruminants have a large supply of symbiotic bacteria in their multiple stomachs capable of secreting enzymes that break down the cellulose in grass, thereby providing nutritional value (Lee, 1992). The technological challenge for the cellulosic ethanol industry is to develop an economically feasible method for converting the cellulose in biomass into fermentable sugars. Once the cellulose in a piece of wood, grass, or paper has been broken apart, the resultant sugars can then be fermented into ethanol. The rest of the processes for producing fuel alcohol from the sugar solution (fermentation, distillation, etc.) are relatively well understood, although work to improve their efficiency is ongoing. Yeast converts the sugars to produce a solution that is 5% to 14% alcohol. This solution can be distilled to produce a 95.6% ethanol solution. Treatment with solvents or adsorbants is required to make 100% (absolute) alcohol (Lynd, 1996). There are essentially three steps involved in the process of converting cellulose to sugar: pretreatment (which breaks down the cell walls of the wood or grass feedstock and helps expose the cellulose); hydrolysis of the cellulose into fermentable sugar molecules; and separation of the sugar solution from the residual materials, such as lignin (Probstein and Hicks, 2006). Pretreatment Pre-treating cellulosic biomass makes it easier for the enzymes to get to the cellulose and convert it to fermentable sugars. Without pretreatment, the yield of sugar is less than 20%, but with pretreatment it can be greater than 90%. Methods include dilute-acid pretreatment, steam explosion, ammonia fiber explosion, and treatment with solvents (Lynd, 1996). Pretreatment combined with hydrolysis also shows some promise (Ryu and Lee, 1983). The choice of pretreatment is important for at least two reasons: its costs typically account for one-third of the total costs of


producing ethanol from biomass, and by-products of certain pretreatment approaches have the potential to inhibit enzyme activity (Lynd, 1996). Hydrolysis There are methods other than enzymes for breaking apart cellulose into its component sugar molecules, including treating it with acid. However, chemical approaches like acid hydrolysis can create undesirable by-products which decrease the yield of ethanol (Lee, 1992). One of the challenges with cellulosic ethanol is that two types of sugar are produced by the hydrolysis reaction: six-carbon sugars (like glucose) and five-carbon sugars (like xylose). Generally, yeasts capable of fermenting glucose cannot also ferment xylose. A great deal of interesting work has been done to combine enzyme production, hydrolysis, and fermentation (Ho et al., 1998). As summarized by Lynd (1996), attempts have been made to combine cellulase hydrolysis with the subsequent fermentation of six-carbon sugars and five-carbon sugars, and to combine everything—production of the enzyme, hydrolysis, and fermentation—into one consolidated bioreactor. The most likely approach to creating a microorganism capable of both producing cellulase enzyme and of fermenting the resultant sugars into ethanol is to genetically modify yeast so that it also produces cellulase enzymes (Lynd, 1996). Separation Lignin is the primary non-fermentable component of biomass, and it must be separated from the hydrolyzed cellulose, typically by filtration. If no market can be found for it in the local area, such as a nearby biomass or coal-fired power plant, an on-site boiler could provide steam and electricity for the process. This type of boiler is expensive, however, and would have to be factored in to the economics of the separation process (Graf and Koehler, 2000).

Startups On February 28, 2007, in response to President Bush’s Twenty in Ten initiative, the U.S. Department of Energy (DOE) announced it was funding six cellulosic ethanol plants, each using different cellulosic feed stocks and different technologies to produce fuel ethanol. U.S. DOE Secretary Samuel Bodman stated, “These biorefineries will play a critical role in helping to bring cellulosic ethanol to market, and teaching us how we can produce it in a more cost effective manner.” (Stevens, 2007) By January of 2008, the U.S. DOE had announced over $1 billion in funding for biofuels research and development projects, including several small 1/10th scale pilot plants, research centers for improving enzymes, and alternative approaches to ethanol production, such as the formation of syn gas (Ruggiero, 2007b; Ruggiero, 2007a; Barnett, 2007b; Sherwood, 2007; Barnett, 2007a; Ruggiero, 2007c; Ruggiero, 2008). The broad range of grant recipients is an indication of how much work has yet to be accomplished in order to develop the technology for the economic conversion of cellulose into ethanol. It is also a clear statement of the importance the United States places on developing an alternative to fossil fuels in order to increase energy security and reduce green house gases.

Patent Landscape There have been an increasing number of new patents and patent applications related to cellulosic ethanol in the past few years, focusing on genetically modified feed stocks, methods of pretreatment, hydrolysis, separation, and ways of combining these processes to gain greater efficiency. Although the technology for converting cellulose into sugar with enzymes has been known since cloth-eating fungi were discovered during World War II, the technology to make cellulosic ethanol an economically feasible replacement for

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gasoline is still being developed. The following are a brief sampling of patents and patent applications, and illustrate the variety of work in this exciting area. Feed Stocks Patent application #20070250961 (“Energy crops for improved biofuel feedstocks”) relates to genetically engineering plants to produce not only more biomass, but also the enzymes required to convert the lignocelluloses into fermentable sugars. Other efforts are aimed at hybridizing plants so that they produce less lignin and more cellulose Iogen discovered that a key to selection of a good feedstock is the ratio of fiber to cellulose it contains (“Pretreatment process for conversion of cellulose to fuel ethanol”, patent # 6090595). This may seem like an odd “invention”, but it certainly helps focus the efforts of those wishing to grow particular feed stocks for biofuel manufacture. Pretreatment Martin Marietta Energy Systems was awarded a patent for an “Enhanced attrition bioreactor for enzyme hydrolysis of cellulosic materials” (#5508183). By combining pretreatment and hydrolysis, this process increases the efficiency of the operation and reduces its cost. Hydrolysis A patent application filed in January of 2007 (“Systems and methods for producing biofuels and related materials”, #20070178569) is for ways to use the recently discovered capability of the anaerobic bacterium Clostridium Phytofermentans to ferment cellulosic biomass into ethanol and other useful products. This application illustrates the effort to develop biological organisms capable of simultaneously hydrolyzing and fermenting cellulose into ethanol. Another application (“Methods for enzymatic hydrolysis of lignocellulose”, #20070218530) relates to mixtures of enzymes that synergisti-

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cally improve the yield of fermentable sugars from cellulose. Integrated Process Patents BioJoule has applied for a patent (“Process for the production of biofuel from plant materials”, #20070259412) for an integrated approach for removing lignin from the biomass feedstock using ethanol under pressure, removing the five-carbon sugar xylose from the remaining plant material, and finally converting the cellulose that is left into sugar which is then fermented into ethanol. On a much smaller scale, patent application #20070117195 (“Integrated thermochemical and biocatalytic energy production system”) integrates gasification of low-moisture wastes with hydrolysis and fermentation of high-moisture wastes—all contained on a small flatbed trailer, designed to be taken into remote military operations where waste disposal and a lack of energy and electricity can be a major problem. Many more interesting patents could be reviewed, but hopefully these few examples serve to show the extent of the interest, effort, and money currently being expended on cellulosic ethanol research and development.

SELECTION OF SUPPLY CHAIN COMPONENTS There are three major components of an efficient cellulosic ethanol supply chain. These include growth and collection of raw materials, conversion process, and ethanol distribution. A number of different options exist for the implementation of each of these supply chain components. Establishing a sustainable cellulosic ethanol supply chain depends on the proper selection of components for a given region, in this case Oregon.


Methodology To select the best components for an Oregon based cellulosic ethanol supply chain, the following decision making framework is employed. For simplicity, the three supply chain components are ranked in order of overall importance. Supply chain components are evaluated in order of importance, and with knowledge of previous decisions. This removes potential complexities in our framework that might arise due to interdependencies between supply chain components. Once the priority of each supply chain component is established, the individual options for each component are evaluated based on a set of weighted criteria. Specific criteria are chosen for each component and relative weighting is achieved by distributing one hundred points across each of the criteria. Once the weight for each criterion is established, all options are rated for each criterion on a scale from 1 to 5. This scale is qualitative and each value is defined for a specific criteria. This provides a simple formula for component selection. For example given a supply chain component with four criteria, the selection formula looks like this. S = A×W1 + B×W2 + C×W3 + D×W4 Where Wn represents the criteria weight, and A, B, C, D are the criteria values for a particular option. The component option with the highest S value is selected.

Component Priority To prioritize the supply chain components, the relative priority of each is considered. Ethanol distribution, while significant, is probably the least important of the components for Oregon, because of an abundance of different options that are available. The conversion process component is arguably the most important, except for the fact

Table 2. Component Priority Â€Â€Â€Â€Â€1. Raw Materials Â€Â€Â€Â€Â€2. Conversion Process Â€Â€Â€Â€Â€3. Ethanol Distribution

that it is largely dependent on which feedstock is used. For this reason the raw materials used is highest priority. This leads to the following prioritization of supply chain components (Table 2).

Raw Material Selection Oregon has an abundance of natural resources and byproducts capable of sustaining an cellulosic ethanol supply chain. Resources of interest are principally agricultural residues, forestry thinning, and urban greenwaste. In many cases these cellulosic feedstocks have little or no commercial value and may even have costs associated with their disposal. Conversion of these feedstocks to cellulosic ethanol creates value and offers opportunities for economic growth (Graf and Koehler, 2000). In addition to these natural resources and byproducts there is an opportunity to grow energy crops such as hybrid poplar. Energy crops are “crops grown specifically for their fuel value.”(Iowa State University Bioeconomy Institute, 2008). These crops can be grown to provide a consistent and managed source of local cellulosic feedstock for the cellulosic ethanol industry.

Selection Criteria There are a number of criteria that ought to be considered for selection of the raw materials component of a cellulosic ethanol supply chain. In particular the criteria of yield, availability, feedrate, collection, and cost are most important.

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Table 3.

Table 5.

Criteria Values

Criteria Values

1

< 45 gallons of ethanol per bone dry ton

1

Feedstock in unavailable during some months

2

46 – 50 gallons of ethanol per bone dry ton

2

Very major monthly variation

3


3

Noticeable monthly variation

4


4

Very minor monthly variation

5

> 65 gallons of ethanol per bone dry ton

5

No appreciable monthly variation

Table 4.

Table 6.

Criteria Values

Criteria Values

1

< 100,000 bone dry tons

1

> $40 per bone dry ton

2

100,000 – 499,000 bone dry tons

2

$31 - $40 per bone dry ton

3

500,000 – 999,000 bone dry tons

3


4

1,000,000 – 2,000,000 bone dry tons

4


5

> 2,000,000 bone dry tons

5


A description and relative weighting of each of these criteria follows (Tables 3, 4, 5, 6 and 7). Yield (10 pts) Yield is defined as the number of gallons of ethanol produced from a single bone dry ton of raw material. This is an important number, because it represents the efficiency that is realized from using a particular biomass as raw material. Higher yields are better. Yield only has a minor affect on overall cost and supply, so it is weighted at ten points (Table 3). Availability (40 pts) Availability is defined as the total amounts of a raw material available annually in bone dry tons. This is very important, because it potentially limits the available supply of ethanol from the supply chain. If this supply is not able to meet the market demand, then the supply chain is not effective. Given this major affect on supply, availability is weighted at forty points (Table 4).

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Table 7. Criteria Values 1

Competing industry consumes all at higher price

2

Competing industry, pays higher price

3

Competing industry, pays similar price

4

Competing industry, pays lower price

5

No competing industries

Feedrate (10 pts) Feedrate is defined as variability from month to month in the amounts of raw material available. This is a qualitative criteria based on observations of seasonal variation for a particular raw material. Feedrate potentially affects the available supply of ethanol from the supply chain, but can be mitigated through storage of either the raw materials or ethanol. Given the possibility of mitigation, feedrate is weighted at ten points (Table 5). Collection (10 pts) Collection is defined as potential costs in dollars of collecting raw materials for use as cellulosic feedstock. This criteria includes all costs necessary


to prepare the raw material for transportation, but does not include actual transportation from collection site to processing plant. Collection costs directly affect the profitability of a cellulosic ethanol supply chain, but can also be very much affected by governmental policy such as subsidies, tax breaks, etc. For this reason collection is weighted at ten points (Table 6). Competition (30 pts) Competition is defined as the potential for industries that have competing uses for a particular raw material. These industries can drive up the cost of a raw material if they are willing to pay higher prices to acquire the material. Competition can make a raw material too expensive to be used economically in a cellulosic supply chain. For this reason competition is very important and weighted at thirty points (Table 7).

Raw Materials Available Agricultural Residues A joint study between the USDA and DOE estimates the total annual amount of available feedstock from agricultural sources in the United States to be somewhere around 1 billion dry tons. The majority of this feedstock comes from agricultural residues, which are the biomass left on farmland after harvesting. Examples of agricultural residues useful as cellulosic feedstocks are corn stover and wheat straw. The joint study came to the conclusion that “428 million dry tons of crop residues could be available on an annual basis by 2030.” (Biotechnology Industry Organization, n.d.). Of all the sources of agricultural residue available in the United States, corn stover is by far the most predominant. Agricultural lands annually produce 75 million dry tons of corn stover, with the next closest feedstock being wheat straw at only 11 million dry tons. The amount of corn stover currently available in the United States makes it an excellent feedstock for the emerg-

ing cellulosic ethanol industry (Biotechnology Industry Organization, n.d.). Agricultural residues represent a significant cellulosic feedstock available in Oregon as well. According to an Oregon based study, “agricultural residues account for over 4 million bdt [bone dry tons] per year of potential feedstock for ethanol production.” (Graf and Koehler, 2000). Unlike many other states however, the predominant cellulosic feedstock in Oregon is wheat straw. Numbers provided by Pacific Ethanol (Davis, 2008a) for Franklin and Walla Walla counties show 41,200 available tons of corn stover versus 348,200 available tons of wheat straw. In the state of Oregon there are over 2 million tons of wheat straw produced every year. Wheat straw has an excellent conversion ratio at 60 gallons of ethanol per dry ton. The potential ethanol production from wheat straw alone is “roughly 90 million gallons of ethanol per year” (Graf and Koehler, 2000) once sustainability practices are taken into account. Another agricultural residue available in Oregon is grass seed straw. Oregon is the world’s leading producer of grass seed, producing around 1 million tons of grass seed straw annually. Half of this grass seed straw is exported as feed, while the remaining half is disposed of through burning or chopping. Like wheat straw, grass seed straw has an excellent conversion ratio at 60 gallons of ethanol per dry ton (Graf and Koehler, 2000). In Oregon most agricultural residues are either burned or tilled back into the soil. The sale of these residues as cellulosic feedstocks can create additional economic value for farmers. Pacific Ethanol (Davis, 2008a) estimates farmer compensation for cellulosic feedstocks to be somewhere around $15 per ton, after accounting for the cost of chopping, raking, and baling. The collection and use of these agricultural residues has no impact on the growth of food crops as long as a sufficient amount is tilled back into the soil for conservation purposes (Graf and Koehler, 2000).

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Forestry Thinnings Forestry materials represent another potential source of cellulosic feedstock in Oregon. The state of Oregon is made up of approximately 46 percent forest land. Much of this land requires thinning, because of fire suppression practices that prevent the natural cycle of forest fires. A directed effort to thin these forestry lands would create healthier forests and provide valuable cellulosic feedstock for a local cellulosic ethanol industry. Forestry thinnings have a conversion ratio of 66 gallons of ethanol per dry ton. Thinning forestry lands “at a rate of just 2 percent per year … could produce nearly 200 million gallons of ethanol.” (Graf and Koehler, 2000). A potential advantage of using materials from forestry thinning is the possibility that this can be a government subsidized activity. Government subsidies or grants might make sense since carefully managed thinning is an activity that is beneficial to the health of Oregon’s forests. This would create a price advantage in the cost of these materials for use as cellulosic feedstock. A potential disadvantage of using materials from forestry thinning is the pulpwood market. Since materials from forestry thinning may have a higher value if they are sold as pulpwood, sometimes as high as $125 per ton, this would be a competing economic use for this feedstock. Fortunately, the pulpwood market has strict requirements for the quality and conformity of materials they can use. More than likely the cellulosic ethanol industry would have access to significant amounts of material that remain after demands from the paper industry are satisfied (Graf and Koehler, 2000). Urban Greenwaste Urban greenwaste, comprised mostly of yard debris, is another potential source of feedstock for use in an Oregon cellulosic ethanol industry. Currently the majority of this greenwaste is converted into compost, while a small amount is used as boiler fuel. The cost of collecting urban

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greenwaste is around $15 per ton, making it a very affordable source of cellulosic feedstock (Graf and Koehler, 2000). Urban greenwaste is inexpensive and easy to collect, however, the total available supply of cellulosic feedstock from this source is relatively limited. The Oregon Cellulose-Ethanol Study puts the available feedstock from urban greenwaste at somewhere around “270,000 bdt [bone dry tons] of urban greenwaste generated per year in Oregon.” (Graf and Koehler, 2000). Compounding this is the fact that urban greenewaste has a low potential ethanol conversion at only 46 gallons per dry ton. The projected yield is far from sufficient to support a cellulosic ethanol industry based solely on urban greenwaste. Hybrid Poplar Hybrid poplar is a perennial tree that is grown as a cellulosic energy crop for several reasons. Hybrid poplars grow in a broad range of climates and geographic regions. They continue to grow throughout the entire year, unlike many energy crops that have short growing season. Hybrid poplars can also be harvested every 5 to 10 years and regrown from the remaining roots. All of these characteristics make hybrid poplar an excellent source of cellulosic feedstock (Texas State Energy Conservation Office, n.d.). A major concern with growing energy crops is the use of farmland to produce fuels rather than food. This has been a major criticism against the corn-based ethanol industry in the mid-western United States. Hybrid poplar is an attractive energy crop, because it grows on marginal land. This means that hybrid poplar can be grown on farmland that is currently left unused or fallow, and therefore does not have an impact on normal food crop production capacity. According to the DOE and USDA there are tens of millions of acres of unused farmland available for growing hybrid poplar (Steeves, 2006). Poplar farms can yield 10 tons of cellulosic feedstock per acre every year. This is enough to


Figure 1. Raw Material Data

produce somewhere between 700 to 1,000 gallons of ethanol. The higher estimate is based on research at Purdue University to alter the lignin content present in hybrid poplars (Steeves, 2006). According to Jon Johnson, a researcher at Washington State University, “a 950-acre poplar farm could yield enough biomass to produce one million gallons of ethanol every year.” (Washington State University College of Agriculture, n.d.). According to Purdue University researchers, “planting 110 million acres … could replace 80 percent of the transportation fossil fuel consumed in the United States each year.” (Steeves, 2006). Oregon currently has more than 34,000 acres dedicated to growing hybrid poplar. The majority of these hybrid poplar plantations are grown as raw material for the paper industry, which uses 70 to 80 percent of the harvested biomass. The remaining residue, 7 to 15 dry tons per acre, is available for conversion into cellulosic ethanol (Oregon.gov, 2007). Although the paper industry creates competing demand for hybrid poplar, further planting would likely exceed the economic demand from this industry. Further plantings might allow for

100 percent utilization of the excess harvest by an emerging Oregon cellulosic ethanol industry.

Evaluation of Raw Materials Using the methodology and selection criteria defined above, six potential raw materials are evaluated for use as the raw material component of an Oregon based cellulosic ethanol supply chain. These include wheat straw, grass straw, corn stover, forestry thinning, urban greenwaste, and hybrid poplar. Figure 1 shows the data used to evaluate each of these raw material options. Applying the criteria values defined above, Figure 2 is generated. The formula applied for calculation of the Total for each raw material is as follows. Total = 10×Yield + 40×Availability + 10×Feedrate + 10×Collection + 30×Compensation

Figure 2. Raw Material Evaluation

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Results Examining the results of this evaluation, wheat straw appears to be the preferable raw material component for an Oregon based cellulosic ethanol supply chain. This is due to the fact that it is widely available, at around two million dry tons per year, and does not have a competing industrial use. Of some concern is the feedrate of wheat straw, since this is a seasonal crop, which will need to be stored to support a constant supply of raw materials for processing. A close second option appears to be forestry thinning. This raw material has the highest availability, at almost three million dry tons per year. With competition from the paper industry however, it is unlikely that much of this raw material can be purchased at an economically cost effective rate. The use of this raw material also requires changes in public policy to allow a cellulosic ethanol industry access to Oregon’s forest lands. Results for the other raw materials appear to be very similar to one another. This suggests that any of these remaining raw materials might be used as supplementary raw materials, but are unlikely to be the primary material used for a large-scale Oregon based cellulosic ethanol industry.

pre-treatment (cellulase production), cellulose hydrolysis (breaking apart sugar molecules), fermentation, and distillation. The most critical step in the process of determining which production method to use is the cellulose hydrolysis. This will be the step focused on for this production process selection. There are four different production methods that will be discussed in this paper, including dilute acid hydrolysis, concentrated acid hydrolysis, direct microbial conversion, and enzyme hydrolysis. Each of these production methods has positive and negative aspects and will be analyzed as the process pertains to an Oregon based cellulosic ethanol company.

Selection Criteria

Ethanol Production Process Selection

When determining which production method to use, it is important to systematically rank each option against a set of criteria using the previously discussed methodology. This criteria selection will help to identify the most appropriate process for an Oregon based cellulosic ethanol supply chain. The selection criteria selected for the production process are maturity of technology, cost of operation, ethanol yield, and by-products / environmental issues. Each of these criteria represents a critical aspect of cellulosic ethanol production in Oregon (Tables 8, 9 and 10).

The actual process of cellulosic ethanol production when broken down to the fundamental steps is simply the conversion of sugar molecules into ethanol alcohol through fermentation. This process has been used for centuries and is well understood. The key step in this process is formation of sugar molecules from cellulose within the plant material, also known as hydrolysis. There are several different types of biomass, as mentioned above, and each may require unique features within the individual steps. Regardless of which production method is used, there are similar steps found in all processes for all types of biomass. These are

Maturity of Technology (30 Points) It is important for a start-up, or relatively new, company to have a mature technology. Research and development can be a time and capital intensive process that has high risks. Unless the company investors / owners have deep resources, it is important for an Oregon based cellulosic ethanol industry to select a production process that has been relatively proven and is mature and ready for production. This will increase the overall probability of success and therefore it shall be included in the selection process and will account for 20 percent of the decision. (Table 8)

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Process is still in R&D and requires additional research before being production ready

2

Production is still in R&D phase but is ready for production evaluation

3

Process is in production evaluation process and appears ready for production

4

Process has been used in production but process is still undergoing improvements

5

Process has been used in production for several years with known results

Cost of Operation (35 points) As in any production process for commercialization, cost is an extremely important factor in determining which production method to chose. The production method will ultimately define the profit margins for the company based on the market price of the goods sold. In this case there is already an established market for ethanol in the northwest. That is why the production costs and operation costs will account for 35 percent of the decision. The production cost will be a relative scale because each process can be tailored and modified based on the pre-treatment and fermentation steps, which will affect the overall production cost. This relative ranking will be based on the general production processes based on the steps required (Table 9).

Production Yield (25 points) Another critical factor in determining the production process is the ethanol yield. An Oregon based cellulosic ethanol industry will potentially process thousands of tons of biomass per week and produce millions of gallons of ethanol annually. An increase in ethanol production yield will have a significant impact on the profitability of such an industry. As mentioned in the raw material selection, each biomass has a different theoretical ethanol yield based on the molecular composition of the plant material. Each hydrolysis production process will yield a different percentage of ethanol based on the theoretically amount of cellulose in the biomass. Because of the impact on the success of the company, this criterion will consist of 25 percent of the decision (Table 10).

Table 9.

By-Products / Environmental Impact (10 points) As the global focus changes and environmental impacts become more important, it is necessary for companies to evaluate their processes impact on the environment. In addition to the direct impact on the environment, the production by-

Criteria Values 1

90% efficiency


Major environmental impact and by-products requiring severe mediation and additional processing.

2

Minor environmental impact and by-products negatively impacting ethanol production.

3

Potential environmental impact and by-products requiring mediation which effect ethanol yield.

4

No environment impact and minimal by-products requiring minimal mediation steps without effect to ethanol yield.

5

No negative impact to the environment and no by-products.

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products will also be taken into account. These by-products have several different effects to the process including degradation of sugar molecules, to inhibiting the fermentation process, as well as requiring additional steps to recycle or neutralize harmful agents. All of these will be taken into consideration for this criterion and will account for 10 percent of the selection process.

Ethanol Product Processes Available Dilute Acid Hydrolysis This process of cellulose hydrolysis has been in use since at least 1898 where it was used in Germany (U.S. Department of Energy, n.d.). The biomass material can be broken into cellulose through use of an acid solution under high temperatures and pressures. This process uses ~1% sulfuric acid solution at 215°C (Graf and Koehler, 2000). This process takes several hours, and each sugar molecule reacts differently. The hemicelluloses reacts to the acid first, but will then degrade during the remaining cellulose hydrolysis process. This sugar degradation will ultimately reduce the potential ethanol yield. Another by-product of this diluted acid hydrolysis can be furfural, which will also reduce the ethanol yield. This initially resulted in a 50% efficiency rating (Graf and Koehler, 2000), but has since been altered to include two separate steps. The first step creates the hemicelluloses (C5 sugars) and the second step creates the cellulose (C6 sugars). Each step is followed by a separation step to remove the sugar molecules This process modification has reduced the occurrence of sugar degradation and reduced the production of furfural, which has increased the overall ethanol yield to almost 90% (U.S. Department of Energy, n.d.). Even with this reduction of sugar degradation and furfural production, this process still requires neutralization of the acid through the use of lime. This adds cost to the process by adding extra steps.

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Concentrated Acid Hydrolysis The low acid solution in the previous method requires higher temperatures and pressures as well as longer processing time to break down the cellulase. This processing time was one of the factors causing sugar degradation and furfural production. One method to address these downfalls was the concentrated acid hydrolysis. This process uses a 70% sulfuric acid solution at only 38° and only requires a processing time of 2-6 hours (Graf and Koehler, 2000). This process results in a higher ethanol yield of 85-90% due to less sugar degradation (U.S. Department of Energy, n.d.). Now because of the increased concentration of acid, this process requires an additional step of acid recovery to recycle and reuse the acid in the system. This process requires additional costs and deals with harsh chemicals that require a significant level of control. As shown in Figure 2, this process still requires acid neutralization as well as the acid re-concentration. This process is still very mature and has been in production for several years. It was first developed in USDA’s Peoria Lab in the 1940’s and then again further refined by TVA in the 1980’s, however this process has reached the limits of process improvements and cost reductions in its current form (U.S. Department of Energy, n.d.). The produced ethanol is chemically identical to the dilute acid process. Direct Microbial Conversion Hydrolysis This is the newest hydrolysis method which attempts to separate the cellulase, perform cellulose hydrolysis, and ferment the sugars in one step using micro-organisms (Wyman, n.d.). Because all of the steps are compressed into one single operation, there is significant potential for cost savings and low operational costs (Graf and Koehler, 2000). Currently two bacteria are required to perform the hydrolysis, but they also produce several other by-products which reduce the ethanol output. The current yield is low and the potential yield is


Table 11. Production Method Data Operational Costs

Yield

By-Products / Environmental

Very mature technology with little process improvements

$$$

85-90%

Sugar degradation, furfural creation, and acid neutralization

Concentrated Acid Hydrolysis

Very mature technology with little process improvements

$$$$

85-90%

Acid recycling, acid neutralization

Direct Microbial Conversion

New technology still in R&D

$$ (potential)

unknown

Produces a number of by-products

Enzyme Hydrolysis

Mature process with significant improvements being developed

$$$

>90%

Natural enzymes only

Production Method

Technology Maturity

Diluted Acid Hydrolysis

still unknown due to the age of this technology. This process is still in the research and development phase and will require many more years of research until it is production ready. Enzyme Hydrolysis This technology has been understood since World War II when fungus was observed breaking down tents and cheese cloths (Graf and Koehler, 2000). This is also similar to the process cows perform to digest grass. The biomass is broken down by enzymes which are created by bacteria in the cow’s stomachs. This process can be performed at body temperature and does not require any additional pressure. In order to increase effectiveness this process does require a pretreatment step. All other process methods will benefit from the pretreatment step of reducing and compacting the biomass, but it is a requisite for this process. As shown in this figure there are much fewer steps in this process with less harmful inputs and by-products. In this example a dilute acid

pretreatment is shown, but there are several other options available as stated earlier in this paper. Each pretreatment will have a slight impact on the process sequence as well as overall cost and ethanol yield. This process technology is not new, but there are still major steps that can be taken in the commercialization of this process. Currently ethanol production by enzyme hydrolysis is more expensive than either acid hydrolysis method, but there is still significant cost savings and process improvements that can be made significantly reducing the overall cost of ethanol (U.S. Department of Energy, n.d.).

Evaluation of Ethanol Production Methods In accordance with the evaluation methodology described above the potential product methods are ranked and scored according to the data shown in Table 11. These rankings are a summary of

Table 12. Weighted Values ranking of Ethanol Production Methods Production Method

Technology Maturity (30)

Operational Costs (35)

Yield (25)

By-Products / Environmental (10)

Total

Diluted Acid Hydrolysis

5

3

4

3

385

Concentrated Acid Hydrolysis

5

1

4

3

315

Direct Microbial Conversion

1

5

1

4

270

Enzyme Hydrolysis

4

3

5

5

400

553


the information above in the production process section. After applying the criteria rankings as described above, the data can be seen in Table 12. The formula used to calculate the Total value in Table 17 is as follows: Total=TechnologyMaturity×30+OperationalCos t×35+Yield×25+ByProducts×10

Results After evaluating the different ethanol production methods it can be seen from the results in Table 12 that an Oregon based cellulosic ethanol industry should adopt the Enzyme Hydrolysis production method. This process has proven to be successful and will continue to see significant cost savings over other production methods. This production method will only continue to improve as the enzymes are designed and improved to generate higher ethanol yield and produce little to no byproducts with minimal impact to the surrounding environment. The diluted acid hydrolysis method came in a close second because it has also been proven and has a lower operational cost then the concentrated acid hydrolysis. The improvements in this method by creating the two step process have significantly increased the yield while simultaneously reducing the by-products. This would be a logical method to further investigate as a potential ethanol production process.

Ethanol Distribution Selection Transportation costs for biomass are relatively high due to their low density, so that the location of an ethanol plant will be largely determined by a local source of inexpensive cellulosic feedstock. Once the ethanol is produced, suppliers must select an economical method to deliver it to market. The market may be some distance from

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the ethanol plant, and the transportation options may be limited. Morrow, et al. (2006) modeled ethanol shipping costs within the United Sates, and provided estimates for pipeline, truck, and rail distribution costs. Figure 13 shows the percentages of each of these methods used for transporting petroleum products. Unfortunately, ethanol cannot be shipped in the same pipeline system with petroleum products due to ethanol’s tendency to absorb moisture and the presence of water in petroleum pipelines. Even though “much of the existing petroleum pipelines could be converted to ethanol transport (Morrow et al., 2006),” until such time as ethanol surpasses gasoline as the predominant transportation fuel, it is not unlikely that those pipelines will be converted to ethanol, nor is it likely in the short term that separate pipelines will be constructed due to their high initial cost. Until a pipeline is economically feasible, the main methods of ethanol shipments will be truck, rail, and where available, ships or barges.

Selection Criteria Although cost is probably the number one criteria for selecting the ethanol distribution method, there are other criteria that ought to be considered as well, such as the method’s efficiency in using fossil fuels and its emissions of greenhouse gases. The reason for considering these factors in addition to cost is that the overall environmental impact of a shipping method can negate some of the environmental benefits of producing a fuel from renewable resources. Availability, of course, will often dictate the choice of transport, but it may also be possible to combine, say truck and barge to optimize shipping costs. A description and relative weighting of each of these criteria follows (Tables 13, 14, 15 and 16). Availability (45 pts) Clearly, if a transportation method is not available, it cannot be utilized for transporting a finished



No availability

2

Very limited availability

3

Limited availability in some regions, but not all regions of Oregon

4

Limited availability in all regions of Oregon

5

Widely available in all regions of Oregon


> $0.20 per ton-mile of ethanol shipped

2

$0.15 – $0.20 per ton-mile of ethanol shipped

3


4


5

< $0.05 per ton-mile of ethanol shipped


< 100 miles per gallon of fossil fuel

2

100 - 200 miles per gallon of fossil fuel

3


4


5

> 400 miles per gallon of fossil fuel


> 2.0 grams emissions per ton-mile of ethanol transported

2

1.5 – 2.0 grams emissions per ton-mile of ethanol transported

3


4


5

< 0.5 grams emissions per ton-mile of ethanol transported

product. Availability in Oregon is qualitatively evaluated, with the highest score given to transportation modes that are widely available (regardless of their cost). Although it could arguably have been made the second most significant factor after cost,

availability is weighted at 45 points since cost will likely be the determining factor where more than one mode is available (Table 13). Cost (35 pts) The cost of shipping ethanol is here defined in terms of dollars per ton of ethanol per mile ($/ ton-mile). For the ethanol producer, this is obviously an important number, but it should be noted that for 10% ethanol/gasoline blends, the effect of transportation costs on the final pump price of fuel is relatively small. (For example, the cost of trucking a gallon of ethanol from Portland to Seattle to blend with 99 gallons of gasoline would only add about $.01 to the cost of a gallon of fuel (Morrow et al., 2006).) Shipping cost is weighted at 35 points, because it is probably the most significant factor in the choice of distribution method for most producers after availability (Table 14). Fossil Fuel Efficiency (10 pts) Fossil Fuel Efficiency is defined as tons of cargo that can be transported per gallon of fossil fuel. Although fuel efficiency is related to the overall cost of shipping (and ever more so as petroleum prices increase), the reduction in usage of fossil fuel can potentially be seen as a marketing advantage since it reduces the overall “carbon footprint.” Fossil fuel efficiency is weighted at ten points (Table 15). Greenhouse Gas Emissions (10 pts) Greenhouse gas emissions is defined as the total grams of hydrocarbon, nitrous oxide, and carbon monoxide equivalent emissions per ton-mile of ethanol transported, as reported by a USDA study (U.S. Department of Agriculture, n.d.). Reducing greenhouse gas emissions is part of the rationale for moving to cellulosic ethanol, so that there are marketing as well as economic advantages to using “greener” transportation methods. Greenhouse gas emissions are weighted at ten points (Table 16).

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Table 17. Distribution Method Data Distribution Method

Availability

Cost

Fossil Fuel Efficiency

Truck

Widely available in all regions

> $0.20 per ton-mile

< 100 mpg

> 2.0 grams emissions per ton-mile

Rail

Limited availability in all regions

$0.10 – $0.15 per ton-mile

200 – 300 mpg

1.0 – 1.5 grams emissions per ton-mile

Barge

Limited availability in some regions

< $0.05 per ton-mile

> 400 mpg

0.5 – 1.0 grams emissions per ton-mile

Pipeline

No availability

< $0.05 per ton-mile

> 400 mpg

< 0.5 grams emissions per ton-mile

Available Distribution Methods Truck The trucking industry is nearly ubiquitous in the United States, and may be the only transportation method available for remote forestry or agricultural locations. Trucking accounts for 70% of the value and 60% of the weight of goods transported in the United States, approximately $9 trillion of annual shipments (U.S. Department of Transportation, n.d.). In Oregon, trucks provide a reliable, if not inexpensive, means for transporting both bulk feedstock to a production facility and finished ethanol to market. The cost for transporting cellulosic ethanol is roughly $.22 per ton-mile (Morrow et al., 2006), about twice the cost of rail. It is not a particularly efficient mode of transportation. Although it may sound good when compared to a passenger vehicle’s gas mileage, one ton of cargo can only go about 59 miles on one gallon of fuel. It also has the highest combined hydrocarbon, nitrogen oxide, and carbon monoxide emissions of the various modes, approximately 2.44 grams per ton per mile (Tidewater River Transportation Services, n.d.a). Rail Rail is an attractive alternative to trucking, in that rail lines connect most major cities and towns and are designed for carrying bulk goods long distances. Perhaps it is surprising, then, that only

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Greenhouse Gas Emissions

three percent of the value and ten percent of the weight of goods transported in the United States go by rail (U.S. Department of Transportation, n.d.). This undoubtedly is because railways are far less convenient and available than trucks for point-to-point deliveries, but for the transportation of fuel ethanol to distribution centers, rail may provide a relatively cost-effective and available alternative. In Oregon, trains may provide a less expensive means for transporting both bulk feedstock to a production facility and finished ethanol to market. The cost for transporting cellulosic ethanol is roughly $.11 per ton-mile (Union Pacific, n.d.), which allows a producer to ship his product to more distant markets for the same cost. It is much more efficient than trucking in its usage of fossil fuels: one ton of cargo can be carried about 202 miles on one gallon of fuel. It is also more environmentally friendly than trucking, with combined hydrocarbon, nitrogen oxide, and carbon monoxide emissions of approximately 1.52 grams per ton per mile (Tidewater River Transportation Services, n.d.a). Barge Transporting goods via our nation’s waterways dramatically reduces the cost of shipping, but of course its availability depends entirely on the location of the ethanol facility (and may factor into site location decisions). Waterways account for the movement of about five percent of the


value and nine percent of the tonnage of goods transported in the United States (U.S. Department of Transportation, n.d.). Oregon and Washington share the Columbia River waterway, and the Willamette also provides a convenient mode of transportation for Oregon companies located near the river. Barges in Oregon handle grain, refined petroleum products, wood and wood products, fertilizer, and potentially cellulosic ethanol. Barging products is both inexpensive and environmentally friendly. The cost for transporting cellulosic ethanol via barge is roughly $.02 per ton-mile (Tidewater River Transportation Services, n.d.b), and even though the routes are obviously limited by the geography of the river system, many major cities and their attendant markets are located on rivers. Barges are the most efficient of the three transportation modes considered so far in their usage of fossil fuels: one ton of cargo can be carried about 514 miles on one gallon of fuel. It is also the most environmentally friendly, with combined hydrocarbon, nitrogen oxide, and carbon monoxide emissions of approximately 0.66 grams per ton per mile (Tidewater River Transportation Services, n.d.a). Pipeline As noted above, pipelines could be used for distributing petroleum products or ethanol, but not both due to ethanol’s tendency to absorb moisture. That said, in the United States pipelines account for the transport of nearly seven percent of the value and eighteen percent of the weight of goods

shipped (U.S. Department of Transportation, n.d.). It is inexpensive, efficient, and environmentally friendly, and undoubtedly will be considered as part of a long-term solution to ethanol transportation as production volumes increase. The cost for transporting cellulosic ethanol via pipeline would be roughly $.01 per ton-mile (Tidewater River Transportation Services, n.d.b). The energy efficiency of a pipeline depends largely on the pipe diameter used, but according to one analysis (Trans-Alaska Pipeline System Environmental Impact Statement, n.d.), it is roughly twothirds of the energy requirement of a waterborne transport, or about 680 miles on one gallon of fuel. Data on the combined emissions were not readily available, but an estimate based on this rate of fuel usage would give a combined hydrocarbon, nitrogen oxide, and carbon monoxide emissions of approximately 0.5 grams per ton per mile.

Evaluation of Distribution Methods Using the methodology and selection criteria defined above, four potential transportation modes are evaluated for use as the distribution component of an Oregon based cellulosic ethanol supply chain. These include truck, rail, barge, and pipeline. Table 17 shows the data used to evaluate each of these raw material options. Applying the criteria values defined above, Table 18 was generated: The formula applied for calculation of the Total for each raw material is as follows.

Table 18. Distribution Method Evaluation Distribution Method Component Distribution Method

Availability (45)

Cost (35)

Fossil Fuel Efficiency (10)

Greenhouse Gas Emissions (10)

Total

Truck

5

1

1

1

280

Rail

4

3

3

3

345

Barge

3

5

5

4

400

Pipeline

1

5

5

5

320

557


Total = 45×Availability + 35×Cost + 10×Efficiency + 10×Emissions

Examining the results of this evaluation, the use of barges appears to be the preferable distribution method component for an Oregon based cellulosic ethanol supply chain. Even though it has limited availability, its cost, efficiency, and low environmental impact make it attractive to those producers able to take advantage of it. A close second option appears to be rail. This distribution method has a good balance of availability and relatively low cost, has fairly high efficiency and low environmental impact. For shipments of cellulosic ethanol throughout the Pacific Northwest and where barging is not an option, rail shipments make the most sense. Pipelines, once they become available, will be the clear choice of distribution method. It is perhaps a little surprising given its availability that it nudged trucking out of third place, but the low fuel efficiency and relatively high environmental impact of trucking weighed against it in this analysis.

After selecting the raw material, the production method was analyzed and it was determined that the enzyme hydrolysis process was the optimal production method. While the acid methods, both dilute and concentrated, have been proven and have many years of production history, the enzyme hydrolysis method has the highest efficiency and produces fewer negative by-products. There is also much more scientific work to be done, and production breakthroughs in the enzyme production method will continue to increase the production yields and reduce the production costs. Both acid methods have reached a plateau in production processing and costs. Once the ethanol has been produced, it is important to pick a distribution method that is in keeping with the changing global factors. Although the analysis above indicated that using barges is the optimal distribution method, this is not practical for all locations in Oregon. Barging supplemented by the rail systems would make the best combination given the current distribution options in the Northwest. With the combination of the above supply chain elements, an Oregon based cellulosic ethanol industry would be a successful and sustainable part of our Northwest economy.

Overall Supply-Chain Selection Recommendations

CASE STUDY OF PACIFIC ETHANOL

Results

For a cellulosic ethanol industry in Oregon, there are several raw material selections available, but through the analysis and criteria evaluation it was determined that wheat straw agricultural residue is the optimal raw material. This was due to the abundant supply and minimal competition for this feedstock. As mentioned above, the main downside to this biomass is its seasonal feedrate which would require collection and storage to level ethanol production throughout the year. As a secondary alternative, forestry thinnings are also a logical selection for an Oregon cellulosic ethanol industry.

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In order to validate the elements of this supply chain model, we evaluated an Oregon-based cellulosic ethanol startup company, Pacific Ethanol.

Company Pacific Ethanol Inc. produces, commercializes and sells ethanol and its byproducts in the Western US; it also provides transportation, storage and delivery services through third-party providers. The company is based in Sacramento, CA, and has production facilities in California, Colorado, Idaho and Oregon (Pacific Ethanol Inc., n.d.).


Pacific Ethanol purchases feedstock from thirdparties and resells ethanol to various customers in the Western United States. Pacific Ethanol also arranges for transportation, storage and delivery of ethanol purchased by its customers through its agreements with third-party service providers (Pacific Ethanol Inc., n.d.).

Policy and Market Drivers The primary market driver for Pacific Ethanol was the Renewable Fuels Standard (RFS) signed into law August 2005 which mandates use of renewable fuels (ethanol & biodiesel) in all motor fuels sold in U.S. (7.5 billion gallons by 2012). With this reform the US Senate expects a demand of 36 billion gallons of ethanol by 2022 which will account for depending of fossil fuels In Oregon, Governor Kulongoski signed the Renewable Fuels Standard in July 2007 requiring E10 in Oregon (ODA Measurement Standards Division, n.d.). With these regulations all production stays local and there is still market opportunity to reach the amount of supply needed to meet the demand of E10. Furthermore studies on Ethanol blends by the University of Minnesota have shown that current models and brands of cars, with a regular gasoline engine, can actually achieve better performance using blends greater than 10% (Aulich et al., n.d.); this study could provide an extra incentive for government to further increase regulations for the use of ethanol.

Business Strategy Pacific Ethanol’s motivation for entering the Oregon market was greatly influenced by a change in the state policies regarding the use of ethanol in gasoline; this practically created a market with no local suppliers and no direct competition, the perfect opportunity for an early provider (Davis, 2008b). The company’s strategy is based on building plants close to the market they serve to achieve

lower operational costs in processing and transportation of both ethanol and its byproducts. This provides the company with an advantage over other national producers and imports from ethanol powers like Brazil. Pacific ethanol designed an entrance strategy consisting of three phases.

Low Risk Production Pacific Ethanol started operations in Oregon by opening a plant that uses the same proven and reliable corn-based technology that has been implemented before by other companies and in other Pacific Ethanol facilities. The implementation of this process poses practically no risks due to lack of uncertainties in the production process. Their goal was to create a corn-based ethanol investment to create a profitable business modeled after the successes in the Midwest (Davis, 2008b).

Production Process Improvement A second phase of their strategy, currently under implementation, is to explore alternative feedstocks for integration into their existing facilities. One technology for consideration uses conventional sugar/starch materials, however at the moment the company has no plans of implementing a project with these feedstocks (Pacific Ethanol Inc., 2007). The other technology is cellulosic ethanol for which Pacific Ethanol is building a pilot plant in its Columbia facility located in Boardman, Oregon. This plant will be built using the cellulosic technology developed by BioGasol AgS. Support and consulting are being provided by the Joint Bioenery Institute as well as 23.4 million dollars in grants from the DOE. This is in addition to Pacific Ethanol’s own investment (Ruggiero, 2008; Davis, 2008b).

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Alliances

Pacific Ethanol Business Model

Another component of the strategy is establishing alliances with other players in the bioenergy industry for evaluating strategic opportunities in the development of ethanol production facilities and in storage and distribution infrastructure. Pacific Ethanol has applied for and received 25 million in federal funding; from a total of 39 contestants only 4 grants were awarded. This pilot cellulosic ethanol plant is a result of a combination of governmental incentive, technology from BioGasol, and support from the Joint Bionergy Institute (Davis, 2008b). The institutions taking part in the DOE’s Joint Bioenergy Institute are Lawrence Berkeley National Laboratory (LBNL), Sandia National Laboratories (SNL) and Lawrence Livermore National Laboratory (LLNL); additionally other contributing institutions are the University of California, Berkeley (UCB), the University of California, Davis (UCD) and Stanford University (Joint Bioenergy Institute, n.d.).

Pacific Ethanol operations are divided in three operational companies, each one with a clearly defined area of operation in the supply chain. The advantage of this business model (Figure 3) is that Pacific Ethanol can provide services to other ethanol producers and different players in the bioenergy industry (Pacific Ethanol Inc., n.d.).

Figure 3. Pacific Ethanol Business Model

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Pacific Ag Products This branch is a subsidiary of Pacific Ethanol that handles the marketing and distribution of grain products for the Company. Corn receiving and grain mill operations at Front Range Energy in Windsor, Colorado as well as all Pacific Ethanol plants are handled by Pacific Ag Products. This subsidiary is also responsible for marketing all Wet Distillers Grain produced by the plants and Front Range Energy. In the ethanol production process, after a grain’s starch is converted to ethanol through fermentation, the remaining nutrients are concentrated into wet distillers grain (WDG). WDG is an excellent feed for cattle, poultry and swine (Davis, 2008b).


Table 19. Pacific Ethanol Plants Plant

Location

Status

Output/ year

Columbia

Boardman, OR

In operation

40 million

Madera

Madera, CA

In operation

40 million

Front Range Energy

Windsor, CO

In operation (partially owned)

48 million

Magic Valley

Burley, ID

Construction

50 million

Stockton

Stockton, CA

Construction

50 million

Imperial

Calipatria, CA

Construction suspended temporarily

NA

Pacific Ethanol This division is in charge of putting in place the human and material resources and processes for the production of ethanol and its by-products. This division is responsible for implementing the pilot projects with the cellulosic technologies. Pacific Ethanol has several plants in operation and construction in the Western US with a planned production capacity of 420 millions of gallons per year for 2010 (Table 19). This supply is a just a fraction of the current demands fostered by the federal and state reforms of the previous years.

Kinergy Marketing This division is in charge of distribution and sales of Pacific Ethanol, Inc. Kinergy’s customer base are integrated by the major oil companies as well as some other small players in the energy industry. The operations of Kinergy are driven by the increasing demand for ethanol in the Western United States; this demand exceeds the production capacity of the states of the region so Kinergy sells ethanol produced in the Midwest in addition to Pacific Ethanol’s own production.

Oregon Cellulosic Ethanol Plant Kulinda Davis, Ph. D. and Pacific Ethanol’s Technical Manager, describes the company as a technology integrator which focuses on commercializing

market ready technology; the company does no have an R&D organization and focuses its efforts on improving the production processes developed by other research entities (Davis, 2008b). For the cellulosic ethanol plant the raw material was selected to make extensive use of the abundant resources in the local area. This was the most important criterion in the selection of the feedstocks for the new process, based on this criterion three feedstocks were selected: Corn stover, wheat straw and wood chips. However, their plan to use wood was discarded due to its prohibitive cost, about $100 to $120 per ton. The reason being, that most of this feedstock is used in the pulp and paper industry which is able to pay this cost. Pacific Ethanol expects this cost to commoditize as the ethanol industry grows (Davis, 2008b). The biggest logistic issue for the supply is the process of collecting and baling raw materials in a central collection area where it can gather a considerable amount of feedstock; another issue to consider is the densification of these materials for transportation to make the transportation more efficient. Pacific Ethanol has created its own supply system building alliances with local farmers to ensure the supply of feedstocks for the operation of the demonstration plant which will require 100 tons a day of feedstock. Once the plant is fully operational this will increase to 1000 tons a day (Davis, 2008b).

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Table 20. Comparison of Model to Pacific Ethanol’s Supply Chain Component

Worst Case

Pacific Ethanol

Best Case

Raw Materials

260 - Urban Greenwaste

345 - Wheat Straw / Corn Stover

410 - Wheat Straw

Production Process

270 - Direct Microbial Conversion

400 - Enzyme Hydrolysis

400 - Enzyme Hydrolysis

Distribution

280 – Truck

400 – Barge

400 - Barge

Dr. Davis was in charge of the evaluation of the commercial readiness of cellulosic ethanol technologies. Pacific Ethanol was looking for an end to end solution and for that reason they chose a close-to-self-sustainable process with minimum energy requirements and minimum impact to the environment (Davis, 2008b). This process was developed by Denmark’s BioGasols ApS and had been implemented in a small scale in the MaxiFuels demo plant at the Technical University of Denmark. According to Prof, Birgitte K. Ahring co-founder of BioGasol ApS and professor at the Technical University of Denmark, “the code word for MaxiFuels is maximum utilization. Think of the process as a carbon slaughterhouse. Every carbon atom present in the raw material is utilized, resulting not only in bioethanol but also in other valuable energy products like methane gas and hydrogen. The residual product at the end of the process can be used as a solid fuel. Maximum utilization is a major contributor to the exceptionally competitive production process” (BioGasol ApS Press Release, 2006). Additionally the process creates an excess of fuel gases, mainly methane, which will be used by Pacific Ethanol to power the pilot plant and help to meet the energy requirements of the neighboring corn ethanol plant. DOE‘s Joint Bioenergy Institute will be one of the research partners to perform experiments on the pilot cellulosic ethanol plant, these experiments will be focused on cellulosic enzyme production and development and research on recycling byproducts (Joint Bioenergy Institute, n.d.).

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As for the final product transportation and logistics, the new plant will use the robust distribution channels already in place by Kinergy Marketing, which sells directly to oil companies in the region. Kinergy Marketing transports the ethanol in ships from the production site in Boardman to the Portland Metro Area (Davis, 2008b).

Model Comparison Using the framework described above, Pacific Ethanol’s supply chain implementation is compared against the worst and best case results for our supply chain components (Table 20). It should be noted that Pacific Ethanol is implementing a combined raw material base of 50% wheat straw and 50% corn stover. For this reason the score for their raw materials is calculated with the following formula: RawMaterials = (RawMaterialScore) x (% of material use) According to these results, Pacific Ethanol’s supply chain very closely matches our proposed supply chain model. The only discrepancy is Pacific Ethanol’s combined use of wheat straw and corn stover, versus using only wheat straw. There is a rational explanation for this discrepancy however. Since Pacific Ethanol is already operating a corn-based ethanol production facility, it has large quantities of corn stover left over and readily available from this process. This creates an economic advantage for the use of corn stover that is unique to Pacific Ethanol’s situation.


If they abandon their corn-based ethanol production process at a future date, it would make sense for Pacific Ethanol to change their cellulosic ethanol supply chain to use only wheat straw as a raw material input.

CONCLUSION As we have seen in this paper, there are several factors influencing the drive towards alternative fuels, and both biodiesel and ethanol fuels are beginning to fill this need. Ethanol has many benefits from reducing the U.S.’s dependency on foreign oil to reducing greenhouse gases. It is also a renewable fuel source that can be made from several sources including corn and cellulosic biomass. Ethanol is primarily manufactured from corn in the Midwest due to the simplicity of the process as well as the volume of corn production. The sugar molecules are easily extracted from corn and converted to ethanol. In the Pacific Northwest, the agricultural diversity is significantly different from the Midwest, and there are several other raw materials that are suitable for cellulosic ethanol such as agricultural residues, forestry thinnings, urban greenwastes, or hybrid poplar. All of these feedstocks are available as raw material for ethanol production, but through the analysis in this paper it was determined that wheat straw is the optimal feedstock. This is due to the vast quantities of wheat produced in the Northwest. After the wheat is harvested, the straw is usually burned or composted. There is currently no other major use or industry for wheat straw and therefore it can be collected without competition at a relatively low cost. The only major consideration that must be accounted for is the seasonal production of wheat. In order to meet the annual demand of ethanol would require that the wheat straw be stored for production during the off seasons. This is an important issue that will have to dealt with in order to successfully use wheat straw as the main feedstock. As a secondary biomass source for

ethanol production this analysis showed forestry thinnings to be a suitable feedstock. This again is due to the volume of forestry thinnings available in the Northwest created by the hundreds of thousands of acres of forestry lands. Four basic process approaches were analyzed, although each basic approach can take somewhat different forms using specific process steps developed by different production companies. As shown in the paper, both the dilute acid and concentrated acid hydrolysis processes have been around for many years and have been used for ethanol production for several years as well. These production processes have reached their current limitations in both production yield and cost. On the opposite end of the research and development spectrum is the direct microbial conversion process. This is the newest process that has yet to uncover its full production potential as well as the production cost reductions. Based on the criteria identified in this paper, the optimal production method is enzyme hydrolysis. This is due to the current production development as well as the simplicity of the process and the production yield. All of these factors helped identify this production technique as the best choice for an Oregon based cellulosic ethanol company. After the production of ethanol is completed, it is critical to the success and profitability of the company to transport the ethanol to the end customers and market through an efficient distribution mode. As environmental issues become increasingly important, it is also important to choose a transportation method that has minimal impact on the environment as well as being low cost per mile. Based on the analysis and criteria discussed in this paper, the optimal distribution method is by barge. This has very limited range, but because of the minimal environmental impact as well as low cost per mile, it is the ideal transportation choice. In order to reach the entire market and reach all potential customers, this will likely need to be supplemented with rail transportation. This

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combination will result in the best transportation system for ethanol produced in the Northwest. In order to validate the model and analysis performed in this paper, a case study was performed on a Northwest ethanol production company. Pacific Ethanol has several locations throughout the United States, and is currently developing a cellulosic ethanol plant in Boardman, Oregon. Several aspects of their operation confirm the analysis performed in this paper. The production method chosen by Pacific Ethanol is an enzyme hydrolysis process developed by Biogasol. The distribution system utilized by Pacific Ethanol’s distribution division, Kinergy Marketing, is by barge. Both of these supply chain components directly align with our model. The only area that deviated from the model was the raw material selection. Pacific Ethanol chose to use wheat straw as well as corn stover as feedstock. This deviation is due to Pacific Ethanol’s adjacent corn ethanol production facility. They are already producing corn ethanol, and the corn stover is a by-product of this process. This changes the collection and price values for corn stover and explains the biomass selection by Pacific Ethanol. With this variation accounted for, it can be seen that this model is an accurate representation of the criteria and critical issues that need to be addressed by an Oregonbased cellulosic ethanol production company. This supply chain selection model will provide valuable information and methodology to potential Northwest cellulosic ethanol companies. The component rankings can be re-evaluated based on changing conditions or to address unique situations. The basic structure will still be applicable in each case, but the flexibility of the criteria selection, weightings, and rankings will allow this methodology to provide valuable information to many different companies.

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ACKNOWLEDGMENT We would like to thank Mike Tyler, Casey Zielsdorff, Vitawin Varawut and Ignacio Castillejos for their contributions during this project.

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About the Contributors

Zongwei Luo is a senior researcher at the E-business Technology Institute, The University of Hong Kong (China). Before that, he was working at the IBM TJ Watson Research Center in Yorktown Height (NY, USA). He also served as the Affiliate Senior Consultant to ETI Consulting Limited. His research has been supported by various funding sources, including China NSF, HKU seed funding, HK RGC, and HK ITF. His research results have appeared in major international journals and leading conferences. He is the founding Editor-in-Chief of the International Journal of Applied Logistics and serves as an associate editor and editorial advisory board member in many international journals. Dr. Luo’s recent interests include applied research and development in the area of service science and computing, innovation management and sustainable development, technology adoption and risk management, and e-business model and practices, especially for logistics and supply chain management. *** Kobi Abayomi is Assistant Professor in the Statistics group at the School of Industrial Engineering (ISYE), Georgia Institute of Technology. Kobi Abayomi’s research interests include: Environmental Statistics, Statistical Dependence, Copulas, Imputation, Econometrics, Environmental Economics, and Statistical Measurement of Inequality and Justice. Dr. Abayomi is a alumni of the Georgia Institute of Technology and Columbia University. He was a Predoctoral Fellow at Haverford College, a Visiting Professor and Postdoctoral Fellow at Duke University and the Statistical and Applied Mathematical Science Institute (SAMSI), and a Summer VIGRE (Vertical Integration of Research and Education) Fellow at Stanford University. Dr. Abayomi has a daughter (Xènia), wife and two dogs. Zhao Ang is a freelance researcher based in Brussels, Belgium. His research interests are about China’s energy policy and environmental movement. Mr. Zhao worked on energy related issues with a couple of local and international environmental NGOs in 2004-2007. He is doing an analytical job on wind power development in China with a leading industrial magazine. Mr. Zhao holds MSc. in Environmental Policy and Regulation from the London School of Economics and Political Science. Neda Arabshahi is a graduate student focusing on the implementation of private sector sustainability strategies, in particular systemic changes that reduce greenhouse gas emissions. Neda participated in the Clean Air-Cool Planet summer fellowship program analyzing the cost containment provisions and subsequent economic impacts of climate change legislation being evaluated by the U.S. Congress.


John W. Bagby is Professor of Information Sciences and Technology at the Pennsylvania State University and Co-Director of the Institute for Information Policy. He has developed coursework, provided undergraduate and graduate instruction, conducted sponsored research and published chapters and scholarly articles in the law of information sciences and technology, entrepreneurship, regulatory economics and process, securities law, privacy and security, standardization, environmental law and intellectual property at various RU/VH universities and in professional executive educational programs. Professor Bagby’s interdisciplinary research is sponsored by various state and federal agencies covering projects on tort and product liability reform, tort data management, technology transfer, and intelligent transportation systems (ITS). He has co-authored numerous college texts and served as visiting Fellow/Scholar at the Intelligent Transportation Society of America (ITSAm), the University of Texas at Austin-McCombs School of Business, George Mason University Law School’s Critical Infrastructure Protection Program and the University of Maryland-Smith School of Business. Rob Bailis’ research is focused on resource access, poverty, and links between social welfare and environmental change. He studies these issues primarily in the context of energy use in the developing world. His current work includes research on household energy, biofuels, and carbon markets. Laurent Béduneau-Wang is expert on (1)strategy & transformation of business models and (2) financial system issues. Within the Strategy and Sustainable Development Department of a Fortune 500 company, he is specializing on competitive strategy for the Board of Administration. He is also the President of Europe-Asia Finance (EURASFI), a think tank dedicated to research about financial systems. He is the Chief Editor and Author of 2 books: “Is China a Financial Giant?” (Vuibert, Paris, 2006) and “French Financial System within the EU” (in Chinese: Faguo Jinrong Tixie” Economics and Management Publishing House, Beijing, 2007). He was also a strategy consultant (Capgemini Consulting, Alma Consulting Group’s CEO, Celestone Group’s CEO). Hing Kai Chan received the BEng degree in Electrical and Electronic Engineering, the MSc degree in Industrial Engineering and Industrial Management, the PhD degree from the University of Hong Kong. He is a lecturer in the University of East Anglia, UK. Prior to receiving his PhD degree, he was a design and project engineer, focusing on instrumentation and measurement in the electronic manufacturing sector. His current research interests include industrial informatics and applications of soft computing on intelligent industrial systems and supply chains, green supply chain, including eco-design. Julien Chevallier is Assistant Professor (Maître de Conférences) in Economics at the Université Paris Dauphine, where he teaches mainly time-series econometrics applied to financial and energy markets. He is member of the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP) and the Laboratoire d’Economie de Dauphine (LEDa). He is also Visiting Researcher with EconomiX-CNRS at the Université Paris Ouest Nanterre La Défense and the Grantham Institute for Climate Change at Imperial College London. He gained his Ph.D. in Economics from the Université Paris Ouest Nanterre La Défense in 2008, and his M.Sc. in Economics from the London School of Economics in 2005. His research focuses on financial econometrics applied to the analysis of commodities markets, including carbon markets (EU ETS, Kyoto Protocol). His work has appeared, among others, in Annals of Finance, Economic Modelling, Energy Economics, and The Energy Journal.

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Tzu-Yun Chiou received the BA degree in Finance from University of Ming Chuan University (Taiwan), and received the MSc degree in Strategic Supply Chain Management from the University of East Anglia (UK). Her research interest mainly focuses on green supply chain management. Her most recent employment has been as a Commercial Buyer for Mars Taiwan in the confectionary and pet food departments. Anda Counotte is assistent professor at the School of Computer Science of the Open Universiteit in the Netherlands. Anda is a biochemist and worked at the School of Sciences of the Open Universiteit, for Royal PBNA and at the Wageningen University. She studied at the universities of Wageningen and Nijmegen in the Netherlands. Tugrul U Daim. Tugrul U Daim is an Associate Professor of Engineering and Technology Management at Portland State University. Dr Daim had been with Intel Corporation for over a decade before he joined PSU as a full time faculty. Dr.Daim’s research involves exploration of technology assessment in industries including automotive, energy, semiconductor manufacturing, communications and health care. He consults with government agencies and companies all around the world. He is also a visiting Professor at Technical University of Hamburg Harburg. Dr. Daim has over 100 papers published in journals and conference proceedings. He is the editor in chief for International Journal of Innovation and Technology Management. He has a PhD in Systems Science and Engineering Management and MS in Engineering Management from Portland State University, MS in Mechanical Engineering from Lehigh University and a BS in Mechanical Engineering from Bogazici University in Turkey. Marianne D’Onofrio is a Professor and Chair of the Management Information Systems department at Central Connecticut State University. Previously Dr. D’Onofrio was a professor at Utah State University, University of Wisconsin-Madison, and Indiana University. Dr. D’Onofrio has publications in the Journal of the Association of IS (JAIS), ICIS, Journal of Information Technology Theory and Applications (JITTA), Journal of Informatics Education Research (JIER), the Journal of Education for Business (JEB), and elsewhere. Marco Dorenbos is senior lecturer ICT at Fontys University of Applied sciences and organizes lectures system development and social responsible entrepreneurship. Marco Dorenbos started to work as system developer in the banking and finance sector and in the outsourcing business. Later on he worked in public organizations as a system developer in traditional energy companies. After that he became manager ICT first in the Dutch justice organization and later in the Dutch police. He studied Mathematics and Computer Science at the Technical University of Eindhoven and is personally interested in durability by researching the possibilities of recumbent biking. Related to this he drives a velomobiel. Gavin Duke is an Investment Manager with Aloe Private Equity, an entrepreneurial and globally successful investor dedicated to growing highly profitable environmental and socially sustainable companies. Based in the London office he focuses on liaising with the Aloe teams in India and China. He is involved in all phases of the investment process, from screening new opportunities and preliminary evaluation to assisting management during the investment period. Prior to joining Aloe Private Equity Gavin worked for an early stage Cleantech investor that specialises in renewable energy and new ma-

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terials. Gavin has an MBA from Imperial College and a Masters in Chemical Engineering from the University of Manchester. Sedef Ergün: She was graduated from Ankara Başkent University, Faculty of Engineering, Industrial Engineering Department in 2005. She followed the M.S Courses of Industrial Engineering at Çankaya University from 2005 to 2008. Meanwhile, she worked as a Consultant at Likom Software, a company producing Enterprise Resource Planning (ERP) software. From 2007 to 2008, she worked as Researcher at the National Productivity Center, in a special project concerning eco-efficiency studies improving productivity in Small and Medium Sized Enterprises. She has completed her M.S education and held the Master Degree on Industrial Engineering on 2008. Mrs. Sedef Ergün participated to Drogsan Pharmaceuticals, a company producing finished pharmaceutical products in Ankara, as a Logistics & Production Planning Specialist in 2008. Her business position in this company is to organize Material Requirement Planning (MRP) and Enterprise Resource Planning (ERP) and to arrange logistics activities covering raw material purchasing. Jean-Christophe Fann (BS’06, MS’09) practices in the construction industry as an architectural engineer with a particular focus on airport projects. He graduated from the Université Libre de Bruxelles in Belgium with a Bachelor’s and Masters degree in architectural engineering. As a Masters candidate, Jean-Christophe was a visiting researcher in the Department of Civil and Environmental Engineering at the University of California, Berkeley, where he was advised by Dr. Jasenka Rakas of the National Center of Excellence for Aviation Operations Research (NEXTOR) research group. Jean-Christophe has professional experience in architectural and engineering firms in the United Kingdom and Belgium and also held a consulting position at McKinsey & Company. His main research interest is in the environmental impact of building and infrastructure projects. Jean-Christophe is conducting ongoing research on the evaluation of the environmental impact of airport developments in collaboration with Dr. Jasenka Rakas. His other interests include the design of large-scale infrastructure and the emergence of environmentally sustainable business and regulatory models. Sophie Galharret is an energy and climate expert with previous experiences in energy industries. She worked in research and development for the GDF SUEZ group on the regulation of gas markets, the European carbon market and energy outlook scenarios, before heading the research programme on the economic instruments for climate change mitigation. Within the Institute for Sustainable Development and International Relations (IDDRI, Sciences Po, Paris) she is specializing on the transition to a low-carbon development pathway including expertise on carbon markets, industry challenges, energy systems, in Europe and emerging economies. Bob Greenlee. Bob Greenlee is a Manufacturing Engineer at Cascade Microtech in Beaverton, Oregon. He holds a B.S. and M.S. in chemical engineering from Washington State University, an MAT from Hastings College, and a B.A. in English from the University of Washington. He previously worked as an advanced development engineer at Merix Corporation, and has also taught middle school math and English. He is currently pursuing an M.S. degree in Engineering and Technology Management from Portland State University. He has been interested in cellulosic ethanol since college, and has experimented with various approaches to converting grass clippings into ethanol to power his lawnmower.

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Peter Hills is the Director and Chair Professor of Kadoorie Institute, the University of Hong Kong. His research interests centre on the relationship between environmental and sustainability issues and the policy-making process. Over the years, his personal research agenda has moved on from an early interest in transport-environment issues and applications of environmental impact assessment (EIA), to energy-environment problems and more recently to environmental policy processes, environmental governance, sustainable development and ecological modernisation. He has acted as a consultant to various international organizations, including The United Nations Development Programme, The United Nations Economic and Social Commission for Asia and the Pacific, The Asian Development Bank, The International Labour Office, The Asian and Pacific Development Centre, and The European Union. He has recently been working as a consultant for the EU-funded Urban Environmental Planning Programme – Vietnam which has been assisting the Ho Chi Minh City University of Architecture to upgrade its urban planning programmes. Bart van Hoof holds a MSc in Industrial Engineering from Universidad de los Andes, Bogotá, Colombia. Since 2005 he is Professor at the Universidad de los Andes School of Management, Bogotá, teaching Environmental Management in undergraduate, graduate, and executive programs. He also works as consultant at the Center for Strategy and Competitiveness (CEC) of UniAndes School of Management. A.T. Jarmoszko is Associate Professor in MIS at Central Connecticut State University, USA. His primary teaching areas are systems analysis and design and strategic management. Prior to joining CCSU, Dr. Jarmoszko was Manager for Strategic Planning at a major mobile communications company in Central Europe. His current research interests include information systems curriculum, mobile information systems, green computing and strategic management in the communications industry. Suat Kasap: He holds a Ph. D. degree in industrial engineering from University of Oklahoma, Norman, OK. Currently, he is an assistant professor in the department of industrial engineering at the Hacettepe University. His research interests are mostly focused in modeling, analysis, and optimization of complex engineering problems and applications using computational intelligence techniques combined with techniques from probability, statistics, and operations research such as interior point methods that work well for large-scale problems, hybrid approaches for the global optimum, and multi-objective problem solving. Primary application areas include financial optimization, healthcare, environmental problems, telecommunications, quality control, manufacturing, and facility design. Andries Kasper is lecturer ICT at Fontys University of Applied sciences. He lectures in network and computer systems courses. Andries worked as a lecturer at the University of applied Sciences of Arnhem between 1981-1989. Since 1989 he lectures at Fontys. First in the school for Electrical engineering and since 2000 in the school for ICT. Andries studied Electrical engineering at the University of Eindhoven. Chulmo Koo is an assistant professor in Chosun University, Korea. He received a PhD in management information systems from Sogang University, Korea. He was a research associate at the Management Information Systems Research Center (MISRC) in the University of Minnesota, and a faculty of Lewis College of Business in Marshall University, West Virginia. His research area is on Electronic Commerce Strategy and Performance, Green IT Management, Technostress, and Social Network Technologies Us-

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age. His papers have been appeared in the International Journal of Electronic Commerce, International Journal of Information Management, Journal of Internet Commerce, Industrial Management & Data Systems, and Information Systems Frontiers. Currently he does actively research on Green IT Practices and publish in AMCIS 2009 and HICCSS 2010. Jacqueline Lam is a post-doctoral fellow at the Kadoorie Institute, the University of Hong Kong. Her current research focusses on the design and implementation of environmental regulation and the effects on technological environmental innovation, especially with reference to electric vehicles and biofuels development and adoption in Hong Kong, China, USA and UK. Recently, she has also applied the theory of transitional management in the transition to low-carbon energy and transport technologies in these countries. Other ongoing research topics of hers include the relationship between open innovation, environmental performance and corporate competitiveness. Tang Lei is a postgraduate student of Shenzhen Tourism College of Jinan University. In view of the significance and the developmental trend of tourism in future, she selected tourism management as her main research fields. She has participated in some research and development projects such as the Intangible Cultural Heritage research activity. Her research interests include eMarketing in tourism and cultural tourism development & protection. She has done some researches in eMarketing and finished a paper on intangible cultural heritage under the guidance of Dr. Zhang mu. Luo Jing earned her Master of Art majoring in English in Northwestern Polytechnic University of China with an emphasis on applied linguistics, translation and cross-cultural communication. Now she works as a teacher in Shenzhen Tourism College of Jinan University. Her research focuses on tourism English, business English and culture. Joo Eng Lee-Partridge is Professor in MIS at Central Connecticut State University, USA. She taught at the National University of Singapore before joining CCSU in 2002. Her research interests include green computing, knowledge management, group support systems, internet auction and end user computing. She has publications in MIS Quarterly, Journal of the Association of IS (JAIS), Communications of the Association of IS (CAIS), International Conference of Information Systems, Conflict Resolution Quarterly, Marketing Letters and others. Frank Lefley is an Honorary Research Fellow at Royal Holloway, University of London. He received his MSc in Management Systems and Sciences from the University of Hull, his MPhil in Accounting and Financial Management from the University of Buckingham (involving a joint project with the University of Texas at Arlington, USA), and his PhD from the University of London (having studied at both Imperial College and Royal Holloway College). Dr. Lefley’s previously published research has appeared in, Engineering Economist, International Journal of Production Economics, International Journal of Production Research, International Journal of Project and Business Risk Management, International Journal of Enterprise Information Systems, Management Research News, International Journal of Managing Projects in Business, Corporate Finance Review, Operations Management, and Management Decision. He is also a fellow of the Chartered Institute of Secretaries and Administrators, The Association of In-

618


ternational Accountants, and the Royal Society of Arts, and has over thirty years experience in industry as an Accountant and Financial Director. Fiona Lettice is a Senior Lecturer in the Norwich Business School at the University of East Anglia, UK. She is also a Visiting Research Fellow at Cranfield University. The main focus of her research is innovation management. She has led UK (EPSRC and ESRC) and EC research grants and has published papers on this and related topics in journals such as International Journal of Production Economics, International Journal of Technology Management and Entrepreneurship and Regional Development. Bernd Mack holds a Senior Vice President position with Group Deutsche Boerse in Frankfurt/ Germany. In his more than 10 years with the stock and derivatives exchange organization he has been responsible for various strategic business and product development projects. He is a chartered Financial Risk Manager certified by the Global Association of Risk Professional (GARP). He holds degrees in computer science and business administration. He is a research fellow with the e-Finance Lab at the Johann Wolfgang von Goethe University in Frankfurt. He also assumed a lectureship at the University of Applied Science in Wiesbaden where he teaches courses in financial market micro structure. His preoccupation with carbon markets started with his responsibility for the joint launch of carbon futures contracts on both the European Energy Exchange (EEX) and EUREX, the leading European financial derivatives exchange. Since then he has been closely involved in market design consultations on national and European levels. Juan Pablo Madiedo holds a MBA and a MSc in Industrial Engineering from Universidad de los Andes, Bogotá, Colombia. Since 2008 he is part of the Graduate Assistants program at the Universidad de los Andes School of Management, Bogotá, where he teaches Operations, Logistics and Supply Management in undergraduate and executive programs. Mala Mitra received her PhD degree from IIT, Bombay, India, M. Tech and B. Tech degrees from Calcutta University, India. Her field of specialization is VLSI Design and Embedded Systems. Presently she is serving as a Professor in the Department of Electronics and Communication Engineering, PES School of Engineering, Bangalore, India. She is actively involved in technological consultancies for industries. She has around 22 years of experience in research and development labs, industries, and teaching. She was awarded National Scholarship after her tenth standard result. She has won an award from UNITI, Texas Instruments in a contest. Mala Mitra dreams for bridging the gap between industries and academics. Zhang mu is a professor and Chief of the GIS & Tourism Laboratory at the Shenzhen Tourism College of Jinan University, China. He earned his Bachelor and Master degree both major in Geography and later received a diploma and a Ph. D degree in Geography from Fujian Normal University of China, mainly focus on the GIS application in resources development and environment protection. In his postdoctoral research, he also engaged in GIS technology applications and the projects researches have involved agriculture, land use and tourism planning. Since 1985, he has been working as a teacher in college and university for more than 23 years and involved in several national and local government R&D projects. His research interests include geography, e-commerce in tourism, tourist resources development & plan-

619


ning, and the GIS application in tourism. He has more than 70 publications to his credit in Chinese and international journals or conferences in these areas. Ozan Ozcan is a fourth year doctoral student at the University of South Florida in the Industrial and Management Systems Engineering Department. He completed his master studies in the Industrial Engineering Department at the Marmara University in Istanbul, where his research focus was Decision Making. His research interests are social network analysis and the creation of eco-efficient products and processes. He also has over four years of work experience including one year as a senior management consultant within The Scientific and Technological Research Council of Turkey. He is currently member of Informs and IIE and founding president of Omega Rho International Honor Society Chapter at USF. Malgorzata Pankowska is an Assistant Professor of the Department of Informatics at the Karol Adamiecki University of Economics in Katowice, Poland. She received the qualification in econometrics and statistics from the Karol Adamiecki University of Economics in Katowice in 1981, the PhD degree in 1988 and the Doctor Habilitatus degree in 2009, both from the Karol Adamiecki University of Economics in Katowice. She participated in EU Leonardo da Vinci Programme projects as well as gave lectures within the Socrates Program Teaching Staff Exchange in Portugal, Germany, Belgium, and Lithuania. She is a member of ISACA and the Secretary in the Board of the Polish Scientific Society of Business Informatics. Her research interests include virtual organization deployment, ICT project management, IT outsourcing, information governance, and business Information Systems design and implementation. Victor de la Pena received his Bachelor’s degree from The University of Texas El Paso in Mathematics, and his Master’s and PhD in Statistics from the University of California Berkeley. Currently, he is a Professor in the Department of Statistics from Columbia University. He was the founding director of the MS in Actuarial Sciences at Columbia University. Dr. de la Pena has been a Fellow of the IMS since 1999, and has published around 50 papers in refereed journals and conference proceedings. Olga Petkova is a Full Professor in MIS at Central Connecticut State University, USA. Previously, she had taught at several universities in South Africa and Zimbabwe and worked at the Bulgarian Academy of Sciences in Sofia. Her publications are in software development productivity, systems thinking and Information Systems Education. They have appeared in Decision Support Systems, Journal of Information Technology Theory and Applications (JITTA) Journal of Informatics Education Research, JISE, JITCA and elsewhere. Christian Ploberger is a PhD student at the Department of Political Science and International Studies, University of Birmingham (GB). He already participated academic research projects which a focus on regional economic development, conducted by the Department of Economics, University of Salzburg, as well as conducting academic research project on his own for the provincial government of Salzburg, Department of Economics, with a focus on European regional innovation policies strategies. In addition, I also hold a position as a project assistant for Department of Economics, provincial government of Salzburg, with a focus on regional economic development strategies.

620


Darren Prokop is a Professor of Logistics in the College of Business & Public Policy at the University of Alaska Anchorage. He is the chair of the department and the director of the Master of Science in Global Supply Chain Management Program. He received his Ph.D. in Economics from the University of Manitoba in 1999. Dr. Prokop specializes in transportation economics and its effects on international trade and supply chain security. He is also engaged in research examining the role of government policy as related to transportation, infrastructure provision, and non-tariff barriers to trade. Jasenka Rakas is the deputy director of the National Center of Excellence for Aviation Operations Research (NEXTOR) at the University of California at Berkeley, USA. She is the director of the Airport Planning and Design Short Course and a faculty lecturer in the Civil and Environmental Engineering Department. Dr. Rakas is a founder of the UC Berkeley Advanced Aviation Educational Program, the Airport Design Studio and the National Airspace System Infrastructure Conference. In addition, she is vice-chair of the Transportation Research Board Committee for Airfield and Airspace Capacity and Delay of the National Research Council, a part of the National Academies. Dr. Rakas’ main research areas include availability and reliability of aviation systems, airport and airspace capacity and delay analysis, sustainable airports, and cognitive psychology. Her teaching interests are in the area of airport systems planning and design, and air transportation. Dr. Rakas has authored over 50 technical publications and has participated in over 100 high-level presentations and international discussions through conferences, symposia, workshops, or invited talks. Prakash Rao has 26 years of experience in the field of environment and natural resource management with interests in environment, climate change and energy sectors. He holds a Ph.D. in Zoology from the University of Bombay and has coordinated several environment research projects ranging from natural resources to climate change and energy, He has undertaken assignments for the Government of Qatar to assess the environment of the desert and coastal regions and build local capacity for environmental compliances. He has worked as a Senior Coordinator of the Climate Change and Energy Programme at World Wide Fund for Nature-India for several years, coordinating its implementation. Has published more than 20 research papers in reputed journals including several articles in magazines and the media. Dr Rao has published two books including one with Prof. S. K. Dash of IIT, Delhi on Assessment of Climate Change in India and mitigation policies. He is currently an Associate Professor with the Symbiosis Institute of International Business, Hinjewadi, Pune, India and coordinating the Institute’s MBA programme on Energy and Environment. Kingsley Reeves is an assistant professor at the University of South Florida in the Industrial and Management Systems Engineering Department. He completed his doctoral studies in the Industrial and Operations Engineering Department at the University of Michigan, Ann Arbor where his research focus was Engineering Management. His research interest centers on the creation of value across the extended supply chain. His current research focuses on inter-organizational and intra-organizational collaboration within the healthcare supply chain. Kingsley holds four degrees, all from the University of Michigan, including an Electrical Engineering degree and a Master of Business Administration degree. He also has over ten years of work experience including three years as a management consultant within the Automotive Practice of PricewaterhouseCoopers, LLP. Prior to his consulting work, Kingsley worked

621


six years as an engineer at Ford Motor Company. He is currently member of INFORMS, ASEE, and Academy of Management. Sabina Salkic studied Economics in Munich and Frankfurt, where she graduated with a project on “Macroeconomic Implications of Investor Protection under the Markets in Financial Instruments Directive (MiFID)” in March 2007. She gained vocational experience during her studies as a tutor attached to the Economic Policy Department at Frankfurt University, at the Central Bank of Bosnia and Herzegovina and at Deutsche Börse. She started to work for Deutsche Börse in 2006, where she focuses on financial and energy markets regulation and policy. Among others, she is responsible for engaging in consultation processes at European and national level in the respective policy streams. Her specific field of expertise covers MiFID. Joe Sarkis is a Professor of operations and environmental management at Clark University Graduate School of Management, Massachusetts, USA. He earned his Ph.D. in Management Science from the State University of New York at Buffalo. He spent 5 years at the University of Texas at Arlington as an Assistant and Associate Professor in the School of Business. His research and teaching interests including operations management, logistics, supply chain management, corporate environmental management, management of technology, international management, information systems and technology, and entrepreneurship. He has over 150 publications to his name. Chen Shan is a postgraduate student of Shenzhen Tourism College of Jinan University. In view of the significance and the developmental trend of tourism in future, she selected tourism management as her main research fields. She has participated in some research and development projects such as the Intangible Cultural Heritage research activity. Her research interests include event tourism and tourism influence. She has finished and contributed a paper on intangible cultural heritage. Juan Pablo Soto Z. holds a Ph.D. and a MSc. in Economics and Business from Pompeu Fabra University in Barcelona - Spain. He has worked as full time professor at Escola Superior de Comerc Internacional (ESCI) and as assistant professor at Pompeu Fabra University in Barcelona (Spain). He was also the technical director of the Spanish Logistics Center (CEL) and representing Spain in the Cientific Committee of the European Logistics Association (ELA). Since 2009 he is Assistant Professor at the Universidad de los Andes School of Management, Bogotá, teaching Logistics, Optimization Models and Retail Management in undergraduate, graduate, and executive programs. He also works as consultant at the Center for Strategy and Competitiveness (CEC) of UniAndes School of Management. Nidhi Tandon is originally from East Africa, and is Founder and Director of Networked Intelligence for Development. Nidhi works on local grassroots issues, in the context of globalization and increasing disparities between peoples and nations. Recently she has been specialising in digital media, information and communication technologies and applications that enhance women’s livelihoods in developing countries. She designs and runs grassroots training workshops for women’s organizations, small business and farmer communities in East and West Africa and in the Caribbean, enabling women to organize and articulate their priorities around sustainable development. Much of her work revolves around the relationships between women and water, energy, natural resources and policy decisions. She has recently

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published critical articles on climate change and its impact on water, and on the negative implications of biofuel monoculture on women’s land use options. Theo Thiadens is lector ICT governance at Fontys University of Applied sciences. Theo Thiadens worked both in public as well in private organizations, among which Foxboro, IBM, the ministry of education, the Royal Duch navy and the Dutch police. He studied at the universities of Enschede, Delft and Utrecht in the Netherlands en at Cambridge university in England. Theo Thiadens published more then ten books and more then hundred articles on the topic IT governance, management and organization. Marcus Thiell holds a Ph.D. in Business Administration (Dr. rer. pol.) from Friedrich-AlexanderUniversity in Erlangen-Nuremberg, and a MBA (Diplom-Kaufmann) from Hamburg University. He has worked as Research Associate at the Department of Industrial Management at the Friedrich-Alexander University in Nuremberg, and as lecturer in Economics at the Akademie des Handwerks in Hamburg. Since 2007 he is Assistant Professor at the Universidad de los Andes School of Management, Bogotá, teaching Operations, Logistics, Supply Management and Supply Chain Management in undergraduate, graduate, and executive programs.He also works as consultant at the Center for Strategy and Competitiveness (CEC) of UniAndes School of Management. Sibel Uludag-Demirer is an environmental engineer with a Ph.D. degree from Vanderbilt University, Nashville, TN. She worked as a faculty in several Turkish universities and currently she is a Marie-Curie scholar in the Department of Civil and Environmental Engineering at Villanova University, Philadelphia, PA studying the application of molecular techniques in anaerobic digestion of waste activated sludge. Her research interests are wastewater treatment with a special focus on the recovery of valuable products from the waste and pollution prevention. Haifeng Wang is a PhD student in Marine Policy program in University of Delaware. His research area is the GHG reduction from ships, the regulation cost, and the economic impacts on international trade. His dissertation is on the ship-based GHG reduction cost and the impact on global trade. He is also pursuing the master degree in Statistics. Before that, he got both his bachelor and master degree in Economics in Ocean University of China. Yulia Wati is a master student at the University of Chosun, South Korea. She received her Bachelor degree with Honours in Management from the University of Bina Nusantara (UBiNus) in 2007. Prior to her master program, Yulia is a research assistant at Chosun University. During her research assistantship, her papers have been accepted and or published in main MIS conferences proceedings such as AMCIS 2009, HICSS 2010, and PACIS 2010. She is also the co-author of another paper accepted for publication in Journal of Universal Computer Science. Her research interests include Green IT, online social network, virtual community, electronic commerce, electronic health-care, and technostress. Zhang Xiaohong is a postgraduate student of Shenzhen Tourism College of Jinan University. In view of the significance and the developmental trend of tourism in future, she selected tourism management as her main research fields. She has participated in some research and development projects such as the Intangible Cultural Heritage research activity. Her research interests include ecotourism, rural tourism

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and cultural tourism development & protection. She has some publications in some international conferences under the guidance of Dr. Zhang mu. Feng Xiaona is a postgraduate student of Shenzhen Tourism College of Jinan University. In view of the significance and the developmental trend of tourism in future, she selected tourism management as her main research fields. She has participated in some research and development projects such as the Intangible Cultural Heritage research activity. Her research interests include Intangible Cultural Heritage tourism and cultural tourism development & protection. She has finished and contributed a paper on intangible cultural heritage. Tenke Zoltani is an Investment Manager at Islan Asset Management in Switzerland, focusing on emissions project risk and business development. She has worked across the emissions industry, having begun her career at IDEAcarbon in London covering climate policy, economic forecasting, trading strategy and market analysis. Tenke has also worked alongside Lord Nicholas Stern, author of the seminal Stern Review, in climate research and publications. Tenke pioneered the industry’s first primary CER Index in 2008, and since then her skills in project risk assessment and pricing have expanded to cover project investment analysis in developing countries. Tenke also has experience in the biofuels markets, having spent time in managing trading risks of the physical biodiesel market in North and South America. Tenke holds a BA in Economics from Columbia University and an MSc in International Political Economy from the London School of Economics.

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625

Index

A Acid Deposition Monitoring network in East Asia (ADMNEA) 486 acid rain 472, 474, 484, 486, 487, 488 affordable energy 531 agricultural waste 535 air-conditioners 194, 197 air pollution control regulations (APCR) 63, 64, 65, 70 airports 394, 395, 398, 399, 402, 403, 404, 408, 412, 417, 419, 420 airport stakeholders 394, 395, 416 Aloe Private Equity 526, 529, 530, 531, 532 alternative fuels 535, 537, 538, 539, 563, 565, 567 Amazon 115, 116 American Carbon Registry (ACR) 244 analysis of the system 446 anthracite coal fired power plants 297 application programming interface (API) 115 Asia Pacific Economic Cooperation(APEC) 494 Automatic Weather Station (AWS) 185, 186, 187 automobile sectors 62

B balanced scorecard (BSC) 126, 127, 128, 130, 131, 135, 142, 143, 144 benchmarking 297, 298, 299 biodiesel 535, 539, 540, 541, 559, 563 bio-fuel 539 black carbon (BC) 275 blind signal separation (BSS) 77, 78 Bureau of Economic Analysis (BEA) 359, 369

business agreements 110 business models 1, 2, 4, 5, 6, 12, 17, 22, 24, 25, 26, 31, 32, 35, 38, 39, 42, 45, 51 business organizations 110, 120 business strategies 110, 118, 119, 120, 122

C California Air Resources Board (CARB) 60, 61, 62, 68, 71, 73 California Code of Regulations (CCR) 60 California Fuel Cell Partnership (CaFCP) 61, 67 Capability Maturity Model (CMM) 199, 200, 201, 204, 205, 206, 209, 210 cap-and-trade emissions markets 294, 295 cap-and-trade markets 291, 294, 309, 314 cap-and-trade regimes 298 car battery manufacturing plant 436, 437, 438, 446 Carbon Capture and Storage (CCS) 463, 464, 465, 466, 467, 468, 469, 470, 471 carbon compensation 499, 518 carbon dioxide (CO2) 478, 480, 481, 488, 498, 499, 501, 502, 504, 505, 507, 508, 509, 511, 536 Carbon Disclosure Project (CDP) 242, 243, 244, 245, 248, 249, 250, 251, 252, 253, 256, 257, 261, 263, 264, 265, 266, 267, 268, 269, 270 carbon efficiency 293, 297 carbon emission 463, 464 carbon emission calculation 510, 511 carbon footprints 138, 143 carbon-free energy 531 carbon monoxide (CO) 275


Index

carbon neutralization 499, 501 carbon price 463, 464, 466 Caring for Climate (C4C) 241, 242, 243, 244, 245, 248, 249, 250, 251, 252, 253, 254, 255, 256, 257, 258, 263, 264, 265, 267, 268, 269, 270, 271, 272, 273 cathode ray tubes 103 CCS technology 463, 464, 467 cellulosic ethanol 535, 536, 537, 538, 539, 541, 542, 543, 544, 545, 547, 548, 549, 550, 551, 554, 555, 556, 557, 558, 559, 560, 561, 562, 563, 564, 565, 566 Certified Emissions Reduction certificates (CERs) 530, 534 Certified Emissions Reduction credits (CERs) 222, 227, 228, 229, 230, 231, 232, 233, 237, 240 Certified Emissions Reductions (CERs) 212, 213, 214, 215, 216, 217, 218, 219, 220 Certified Public Accountant (CPA) 257 Chicago Climate Exchange (CCX) 244, 245 Chinese Communist Party (CCP) 480, 490 Chinese domestic politics 472 Clean Development Mechanism (CDM) 212219, 222, 225-232, 235, 237-240, 465, 466, 530, 534 clean energy 526, 527, 528, 529, 531, 532 cleaner fuel transport technologies 66 cleaner production 526 Cleaner Production (CP) 440, 441, 459, 461 clean material handling equipment 335 cleantech 526, 527, 528, 531, 532, 533 clean technology 526, 533 clean technology development 526 climate change 1, 2, 3, 12, 13, 14, 15, 16, 18, 24, 28, 470, 472, 473, 474, 475, 477, 478, 480, 481, 483, 484, 485, 487, 488, 489, 526, 528, 531, 532, 533 climate change policy 470 Climate Registry (CR) 244 climatic disasters 334, 335 closed-loop supply chain management (CLSCM) 336 cloud computing 110, 115, 116, 117, 122, 123, 124 cloud providers 115

626

CO2 emissions 335, 338, 348, 349, 353 command-and-control (C&C) 62, 63, 67 Common but Differentiated Responsibility (CBDR) 281, 282, 283, 284 Communications of Progress (COPs) 248, 250, 256, 258, 264 Community Independent Transaction Log (CITL) 216, 218 Compensation Fund Administrator (CFA) 276 competitive advantage 422, 423, 424, 425, 427, 428, 429, 430, 431, 433 concerned citizens 158 Conference of Parties (COP) 177 conservation oriented work environments 131 Copenhagen Accord 388 Copenhagen Climate Conference 199, 209 corporate goals 126 corporate images 154 corporate ranking (CR) 327 corporate social responsibility (CSR) 222 cost-efficient virtualized network resources 112 CP context 441 cross-border pollution 474, 485, 486 cryptography 193, 198

D data centres 91, 92, 93, 94, 95, 97, 98, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 112, 113, 115, 116 data collection 436, 438, 442, 447 decision-makers 164 deforestation 474, 477 Department of Energy (DOE) 244 desertification 474, 477 Designated National Authority (DNA) 229, 230 Designated Operational Entity (DOE) 229, 230 destruction accidents 475 diesel taxi fleets 66 differential global position system (DGPS) 184 digital elevation model (DEM) 184 digital markets 114 digital to analog converter (DAC) 195 Dow Jones Sustainability Index (DJSI) 368, 369

Index

dynamic environments 126, 143

E East Asian Acid Deposit Monitoring Network (EANET) 486, 487, 489 eco-branding 6 eco-design 6, 11, 25 eco-design practices 424 ecological management 517 ecological systems 334 economic development 472, 473, 477, 478, 479, 480, 482, 484, 486, 488, 490 economic developmental strategy 482 economic growth 334, 473, 478, 479, 480, 481, 483, 486, 487, 488, 490 ecosystems 176, 177, 178, 179, 180, 181, 182, 183, 187, 188, 189, 335 electricity market establishment 463, 465, 466, 469 electricity markets 292, 295, 296, 297, 303, 307, 314, 316, 319 electricity risk premium 293 electromobiles 499, 513, 516 electronic printers 197 Electronic Product Environmental Assessment Tool (EPEAT) 202, 209, 210 Electronics Environmental Benefits Calculator (EEBC) 202, 203 El Nino southern oscillation (ENSO) 179, 180 embedded systems 192 emerging markets 334, 344, 345, 346, 354, 355 emission control 68 emissions trading 291, 296, 297, 301, 303, 304, 307, 310, 315, 316, 317, 318 emissions trading scheme (ETS) 212, 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 224, 226, 227, 228, 236, 237, 239, 240 enabling policy environment 526 end-of-pipe technologies 337 Energy Efficiency Design Index (EEDI) 276 Energy Efficiency Operational Index (EEOI) 276 energy production growth rate 478 energy providers 105 energy security 528, 535, 537, 538, 543, 567 Energy Star (ES) 202

engineering 158, 164, 170 environment 472, 475, 477, 479, 480, 481, 482, 483, 484, 487, 488, 490 environmental activities 161 environmental assessment 164 environmental challenges 472, 473, 475, 480, 483, 485, 487, 488 environmental collaboration 366, 381 environmental companies 526 environmental controls 31, 42, 109 environmental costs 436, 437, 438, 439, 440, 460 environmental degeneration 472, 473, 474, 475, 477, 478, 480, 485, 486, 487, 489 environmental evaluations 394, 395, 396, 401, 402 Environmental Impact 396, 417, 418, 420, 437, 439, 441, 442, 443, 448, 457 Environmental Impact Assessments (EIA) 396, 414, 419, 464, 468, 470 Environmental Impact Statements (EIS) 396 environmental issues 472, 473, 474, 475, 477, 480, 483, 485, 486, 487, 488 environmentalists 31, 32, 36 environmental laws 437, 439 environmental legislation 335, 336, 343, 344, 345 environmentally integrated manufacturing 436, 437, 438, 440, 441, 445, 446, 458 environmentally integrated manufacturing systems 436, 437, 440 environmental management 436, 437, 438, 439, 440, 441, 444, 459, 460, 461 environmental management practices 162, 164, 165, 171 environmental management system (EMS) 400, 422, 424, 425, 427, 428, 429, 430, 433, 436, 437, 439, 459, 460 environmental operations management 438 Environmental Operations Management (EOM) 439, 461 environmental operations strategy 439, 445 environmental performance 422, 423, 425, 426, 427, 428, 429, 430, 431, 432 environmental problems 3, 19

627

Index

environmental protection 475, 479, 480, 483, 484, 486 Environmental Protection Agency (EPA) 202, 203, 204, 243, 244, 245, 247, 258, 397, 398, 399, 402, 410, 419 environmental regulation 463, 464, 468, 469 environmental regulations 57 environmental responsibility 110, 120 environmental risk 437, 439 environmental situation 472 environmental standards 31, 32, 33, 34, 36, 39, 41, 42, 43 environmental sustainability 394, 395, 396, 397, 404, 405, 416 environmental sustainability index (ESI) 74, 76, 77, 82, 84, 85, 86, 87 environmental systems 76 environmental technologies 57, 58, 59 environmental wellbeing index (EWI) 75, 76 estimating equations 80 ethanol 535, 536, 537, 538, 539, 540, 541, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 554, 555, 556, 557, 558, 559, 560, 561, 562, 563, 564, 565, 566, 567, 568 European energy markets 292, 293, 303, 304, 311, 319 European Union Allowances (EUAs) 212, 213, 214, 215, 216, 218, 219 European Union Emissions Trading Scheme (EU ETS) 212-222, 224, 226-228, 236, 237, 239, 240, 291, 292, 294, 295, 298306, 309-319 e-waste 138, 141 Extended Producer Responsibility (EPR) Act 203

F Feed-in Tariff (FIT) 527 feedstocks 535, 537, 544, 545, 547, 559, 561, 563 Financial Accounting Standards Board (FASB) 361, 370 Financial Appraisal Profile (FAP) model 321, 322, 323, 324, 325, 328, 330, 331

628

Five-Year Plan (FYP) 473, 475, 477, 480, 483, 484, 485, 489 flexible-fuel vehicle (FFV) 538 focalization 2 forestry residues 535, 539 framework system 492, 493, 524 free cooling 100, 101, 107 fuel ethanol 535, 543, 544, 556, 565, 567 fuels standard 538

G gasoline 535, 536, 537, 538, 539, 540, 541, 542, 543, 544, 555, 559 gasoline prices 535, 538 Generally Accepted Accounting Principles (GAAP) 256 geographical information systems (GIS) 176, 182, 183, 184, 189, 190 global agreement 531 global climate change 492, 498, 536 global climate environment 502 global downturn 526 Global Environmental Facility (GEF) 281 global environmental problems 3 global environmental threats 474 globalization 2, 26 global positioning systems (GPS) 181 Global Reporting Initiative (GRI) 244, 245 global warming 4, 5, 7, 334, 335, 474, 477, 478, 488, 489, 492, 494, 498, 499, 504, 505, 525, 527, 535, 537, 541 Google 115, 116 green computing 131 greener airport systems 394 greener construction practices 394 greener design practices 394, 395, 416 Green Grid 105 greenhouse gas emissions 474, 484 greenhouse gases (GHG) 5, 7, 12, 18, 19, 61, 68, 73, 131, 137, 138, 143, 241-248, 250260, 263, 264, 274-288, 398, 408, 414, 535-537, 541, 554, 563 greenhouse gas (GHG) emissions 387, 388, 389, 390, 392 greenhouse gas (GHG) reduction 274, 275, 276, 277, 278, 279, 282, 283

Index

greening of suppliers 422, 423, 424, 425, 430 Greening through Information Technology Model (GITM) 199, 200, 201, 204, 205, 206, 207, 208, 209 green initiatives 387 green innovation 422, 423, 424, 426, 427, 430, 431, 432 green investors 526 green IT 126, 127, 130-145, 150-155, 161-171175 green IT balanced scorecard , 126, 127, 136, 144, 151 green IT strategies 153, 154, 162, 163, 164, 165, 167, 175 green jobs 526 green logistics 334, 335, 336, 337, 339, 341, 343, 344, 345, 346, 350, 353, 354, 355 Green Maturity Assessment (GMA) 200 green operation management system 517 green practices 334, 335, 337, 338, 340, 344, 346 green product innovation 426, 430, 431, 432 green strategies 162 Green Supply Chain Management (GSCM) 422, 423, 424, 426, 429, 431, 434 green technologies 131, 140, 142, 144, 145, 152 grid casting process 448 grid computing 110, 113, 114, 115, 117, 122, 123, 124 grid middleware 113, 114 gross domestic product (GDP) 75, 77, 295 ground power units (GPU) 399, 421 Ground Support Equipment (GSE) 399, 404, 405, 407, 409, 410 growth strategy 472, 480, 486

H hazardous wastes 436, 460 heater elements 191, 192 Hewlett-Packard (HP) 115 high technology 511 household appliances 197 HP Adaptive Infrastructure as a Service (AIaaS) 115 human development index (HDI) 75, 76

human wellbeing index (HWI) 75 Hurricane Katrina 334 hyper competition 2

I IBM 95, 105, 107, 108, 110, 111, 116, 123 Independent Component Analysis (ICA) 75, 77, 78, 79, 80, 81, 82, 83, 84, 87 Independent Component Analysis via Copulas (CICA) 74, 75, 77, 79, 80, 81, 82, 84, 85, 86, 87 independent marginals 81 India , 526, 527, 528, 529, 530, 531, 532, 533 Indian Institute of Tropical Meteorology (IITM) 180 Indian Mountaineering Federation (IMF) 182 industrial pollution 526 information and communications technologies (ICT) 35, 91, 92, 93, 94, 95, 97, 98, 99, 100, 101, 103, 105, 106, 107, 108, 109, 154, 155, 169, 176, 180, 181, 182, 187, 190 information technology (IT) 200, 201, 202, 204, 205, 206, 208, 209, 210, 528 integrated circuit chips 191 intellectual properties (IP) 32, 42, 43, 44, 45, 47, 48, 49, 50 Intellectual Property Right (IPR) 463, 465, 467, 469, 528, 529 Intercontinental Exchange (ICE) 233, 234, 239 Intergovernmental Panel on Climate Change (IPCC) 177, 178, 179, 182, 189, 225, 463, 464, 470, 494 International Association of Information Technology Asset Management (IAITAM) 202 International Civil Aviation Organization (ICAO) 275 international community 472 International Compensation Fund (ICF) 275, 276, 278 International Crops Research Institute for Semi Arid Tropics (ICRISAT) 181 international enterprises 526 International Maritime Emission Reduction Scheme (IMERS) 283, 284, 285

629

Index

International Maritime Organization (IMO) 274, 275, 276, 277, 278, 282, 283, 284, 285, 286, 287, 288, 289 international relations 472, 487 International Transaction Log (ITL) 213, 215, 216, 218 internet technology 511 IT asset management (ITAM) 202 IT assimilation 155 IT balanced scorecard 126, 127, 130, 134, 135, 138, 139, 144, 145, 146, 149 IT environments 127, 144 IT governance 110, 118, 119, 120, 121, 123, 124 IT industry 115 IT infrastructures 112, 115, 161, 162, 163, 175 IT management 110, 118, 119, 120, 122 IT managers 161 IT practitioners 127 IT resources 156, 162, 167, 168, 170 IT scorecards 127 IT strategies 110, 118, 119, 120, 126, 127, 130, 133, 134, 151

K Kyoto Protocols 275, 278, 281, 283, 285, 388, 390, 531, 532, 534

L Land Use, Land Use Change and Forestry (LULUCF) projects 216 lead-acid batteries 446 Leadership in Energy and Environmental Design (LEED) 37 leapfrogged 532 less-than-truckload (LTL) 390 life-cycle analysis (LCA) 6, 9, 397, 398, 402, 417, 420 linear transformation 77 liquid crystal displays (LCD) 100, 103 logistics 387, 388, 389, 390, 391, 392 logistics systems 334, 335, 336, 337, 344, 345, 355, 357 low-carbon 528, 531 low-carbon city 493, 505 low-carbon economic movement 500

630

low-carbon economic technology 507, 508 low-carbon economic thought 500 low-carbon economy 492, 493, 494, 495, 496, 497, 498, 499, 500, 501, 502, 504, 505, 506, 507, 509, 518, 523, 524, 525 low-carbon era 493, 503, 505 low-carbon life 493, 499, 500, 501, 505, 507, 518, 520, 522, 523, 525 low-carbon life style 493, 505 low-carbon society 493, 505 low carbon technologies 5, 493, 503, 505, 506, 507, 522, 523, 524 low-carbon tourism 492, 493, 494, 495, 501, 502, 503, 504, 505, 506, 507, 508, 509, 510, 511, 512, 517, 518, 519, 523, 524, 525 low-carbon world 493, 505, 525

M Marine Emission Trade System (METS) 275, 276, 278 Marine Environmental Protection Committee (MEPC) 275, 276, 278, 282, 287, 288 marine pollution 474 market-based techniques 294 market efficiency 293 market forces 293 market infrastructures 291, 294, 312, 313, 314 market potential 192 mean integrated squared error (MISE) 81, 82 meteorology 181, 185 methane (CH4) 275 microcontrollers 191, 192, 193, 194, 195, 196, 197, 198 microprocessors 192 Microsoft 112, 113, 115 middleware 113, 114 million metric tons of carbon equivalent (MMTCE) 247 Ministry of New & Renewable Energy (MNRE) 529 mobile communication 511 mobile phones 103 model and method 492 Multi-Attribute Utility Theory (MAUT) 401, 402

Index

Multi-Criteria Analysis (MCA) 396, 400, 401, 408 Multi-Criteria Decision Making (MCDM) 394, 395 multidimensional environmental challenges 472 municipal waste 535, 541

N National Association of State Chief Information Officers (NASCIO) 205, 209 National Green Building Program of the National Association of Home Builders (NAHBGreen) 38 natural-resource-based view 358, 360, 363, 373, 375, 376 nitrogen oxides (NOx) 66, 223, 224, 236, 238, 275 non-governmental organizations (NGO) 182, 426, 469 North American Industry Classification System (NAICS) 359, 369, 370, 386 North Carolina Division of Pollution Prevention and Environmental Assistance (DPPEA) 338 notebooks 103

O Occupational Safety and Health Administration (OSHA) 36 on demand operating environment (ODOE) 114, 125 on-site recycling 336, 340, 352 organic waste 530 ozone depletion 474

P Pacific Decadal Oscillation (PDO) 75 Pacific Ethanol 535, 547, 558, 559, 560, 561, 562, 563, 564, 565, 566, 568 particulate organic matter (POM) 275 Planning, Environment and Lands Bureau (PELB) 62, 63, 65, 73 plug-and-play 111 policy 526, 527, 528, 529, 530, 531, 532

political stability 472 pollution 3, 12, 29-37, 41-46, 128, 131, 132, 133, 138, 141, 142, 143, 158, 159, 162, 166, 472, 474, 475, 477, 478, 483, 484, 485, 486, 487, 488, 489, 490 pollution control equipment 131 pollution prevention and control Polygenta 529, 530, 532 power distribution unit (PDU) 105 power usage effectiveness (PUE) 105, 108 pragmatists 158, 159 pricing fundamentals 295 Primary CERs (pCERs) 213, 215 principal component analysis (PCA) 75, 77, 78, 79, 80, 82, 83, 84, 85, 86 private equity 526, 528 private equity investment 526 proactivists 158 procurement 97, 99, 109 production technologies 131, 133 product life-cycle 440, 461 public perception 154 public policy development 31, 32

Q QUality-Ethics-SafeTy (QUEST) 425 quality of service (QoS) 114, 121 Quiksilver 7, 8, 10, 11

R radio-frequency identification (RFID) 193, 197, 198 radio-frequency identification (RFID) tags 193 rationalize polynomial coefficient (RPC) 184 raw materials 436, 437, 438, 440, 442, 443, 444, 446, 447, 448, 449, 450, 451, 457, 458 recycled wastes 448 recycling 526, 530, 534 re-distribution systems 337 renewable energy 481, 482, 483, 484, 485 Renewable Fuels Standard (RFS) 559, 568 research and development (R&D) 33, 34, 43, 44, 45, 467 Research, Development and Demonstration(RD&D) 464, 467, 468

631

Index

resource-based theory 155, 169, 170, 173 resource-based view (RBV) theory 362, 363 resources depletion 3 respirable suspended particulates (RSP) 66 reverse logistics 334, 336, 356, 357 Ripcurl 7, 8, 9, 10, 11, 27, 29 risk management 293, 301, 313, 315

S safety razors 192 sea-level rise 472 secondary CERs (sCERs) 213, 215, 218, 219 secondary markets 292, 294, 299, 300, 301, 310, 311, 312, 313, 314, 317, 318 secondary market trading 291, 295, 298, 299, 300, 304, 311 security 473, 477, 484, 485, 486, 487, 488, 489, 490 setup waste 451, 452, 453 shareholders 3, 4, 13, 25 shareholder value 3, 13 Ship Energy Efficiency Management Plan (SEEMP) 276 singular value decomposition (SVD) 82, 83, 84, 85 small and medium enterprises (SMEs) 424 social capacity 86 social crisis 3 social responsibility 110, 117, 119, 120 societal costs 33, 34 software as a service (SaaS) 115, 116, 121, 125 soil degradation 474 soil erosion 472, 477 solar energy 193 stakeholders 3, 12, 28, 59, 61, 62, 63, 65, 66, 67, 68, 69, 70, 72, 127, 128, 135, 138, 139, 140, 143, 144, 158, 160, 161, 165, 171, 178, 187, 188, 190, 337, 346, 349 stakeholder value 3 standards development activities (SDA) 35, 37, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 55 standards development organizations (SDO) 32, 35, 37, 38, 45, 47, 48, 49, 50, 55 standards-setting organizations (SSO) 32, 55

632

Statistical and Applied Mathematical Sciences Institute (SAMSI) 87 storage area networks (SAN) 112 storage systems 109, 113 strategic balanced scorecard (BSC) 135, 143 strategic petroleum reserve (SPR) 537 sulphur dioxide (SOx) 223, 224, 236, 238 Sun Microsystems 115 Supercritical Pulverized Coal(SCPC) 464 supplier loyalty 161 suppliers 338, 349, 350, 351, 353, 354 supply chain management 387, 388, 389, 390, 391, 392 Sustainability Focused Companies (SFCs) 363, 364, 365 sustainable business scorecard 135 sustainable development 110, 117, 119, 120, 123 sustainable working 93, 109

T tax exemptions 58 taxi trade 62, 63, 64, 65, 66, 67, 68, 70 TCE theory 365 technological environmental innovation (TEI) 56, 57, 58, 62, 64, 66, 67, 68, 69, 70 technological innovation 526, 527 technology transfer 531 telecommunications 109 TEU (Twenty-foot Equivalent Unit) 391 Texas Instruments 191, 193, 198 Tool for the Reduction and Assessment of Chemical and Other Environmental Impacts (TRACI) 397, 398, 402 Total Quality Management (TQM) 207 tourism development 492, 493, 494, 495, 500, 501, 502, 503, 504, 505, 506, 507, 508, 509, 517, 518, 522, 523, 524, 525 tourism enterprises 503, 504, 505, 506, 507, 508, 509 tourism industry 492, 500, 503, 509 tourism sustainability 524 trading markets 294, 297, 304, 306 traditional environmental impact assessments 394, 395, 416 traditional supply chain management 422

Index

transportation 387, 388, 389, 390, 391, 392 truckload (TL) 390, 392 Twenty in Ten 538, 543

U unconventional energy sources 193, 194 uninterruptible power supply (UPS) 92, 98, 100, 107 United National Convention on Law of the Sea (UNCLOS) 283 United Nation Framework Convention on Climate Change (UNFCCC) 281, 282, 283, 286, 287 United Nations Convention to Combat Desertification (UNCCD) 177 United Nations Development Program Millenium Development Goals (UNDP-MDG) 87 United Nations Development Program (UNDP) 75, 87, 89 United Nations Framework Convention on Climate Change (UNFCCC) 177, 212, 213, 390 United Nations Global Compact 241, 242, 244, 245, 248, 256, 259, 263, 264 U.S. Environmental Protection Agency (EPA) 36 U.S. Green Building Council (USGBC) 37, 402 U.S. National Institute of Standards and Technology (NIST) 40, 50, 52 U.S. Office of Management and Budget (OMB) 36, 39, 42, 47, 48, 50

V value chains 335, 336, 337, 338, 342, 346 value creation 337, 347, 349 vehicle design standards 63, 64 vertical integration 358, 359, 360, 361, 362, 363, 364, 365, 366, 367, 368, 369, 370, 371, 373, 374, 375, 376, 377, 378, 379, 381, 386

virtualisation 100, 102, 103, 106, 107, 110, 111, 112, 113, 114, 116, 117, 119, 120, 121, 122, 123, 124, 125 virtualized services 114, 115, 122 virtualized systems 113 virtual machines 110, 112, 125 virtual servers 112, 124 volatile organic compounds (VOC) 275 voluntary-based participation 60 voluntary consensus standards bodies (VCSB) 36, 41, 47 voluntary consensus standards (VCS) 35, 36, 37, 40, 42, 48, 55

W warehousing systems 335, 340 washing machines 192, 197, 198 Waste Electrical and Electronic Equipment (WEEE) 203 waste handling 132 waste management 131, 436, 437, 438, 440, 441, 442, 443, 444, 445, 446, 447, 448, 452, 453, 457, 458, 459 waste prevention 422 waste treatment 526 water resource management 182 weighted sum model (WSM) 401 wet distillers grain (WDG) 560 Wikipedia 109 windfall profits 294, 298, 299, 317, 319 wind-power 481 wind power energy 193 wireless sensor networks 193, 198 World Heritage sites 178 World Wide Fund for Nature (WWF) 178, 180, 181, 190

Z zero-emission buses (ZEBuses) 60, 61, 62, 66, 67, 68, 69, 70 zero emission bus regulation (ZEBus Regulation) 60, 61, 62, 66, 67, 68, 69, 70

633

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