Voluntary carbon offsetting : A case study of Husqvarna AB from a firm, consumer and society wide perspective

Voluntary carbon offsetting

A case study of Husqvarna AB from a firm, consumer and

society wide perspective.

Bachelor’s thesis in Economics

Authors: Sofie Svensson, 780307-2409 Maria Rothén, 840412-2502 Tutors: Professor Börje Johansson

PhD Candidate James Dzansi Jönköping June 2010

Bachelor’s Thesis in Economics

Title: Voluntary Carbon offsetting, A case study of Husqvarna AB from a firm, consumer and society wide perspective

Author: Sofie Svensson

Maria Rothén

Tutor: Professor. Börje Johansson PhD Candidate James Dzansi

Date: [2010-06-10]

Subject terms: CO2, Carbon Offsetting, CBA, Climate change

Abstract

Global warming is an international problem which has led to that many corporations today has an increased environmental awareness.

This thesis includes a Cost Benefit Analysis (CBA) approach which evaluates whether carbon offsetting is a profitable alternative for corporations and society wide. The study is predominately focusing on the emissions of the greenhouse gas . The calculations of CBA show the difference between the scenarios with or without the carbon offsetting. In the CBA approach effects are divided into benefits and costs.

The study includes a case study of Husqvarna AB and is carried through with aim to get a decision support whether or not to make the corporation carbon neutral. Basic data from Husqvarna AB has been used.

Abbreviations

CBA Cost-Benefit Analysis

CDM Clean Development Mechanism CER Certified Emission Reduction CO2 Carbon Dioxide

EIA Energy Information Administration EUA European Union Allowances

ERPA European Emission Reduction Purchasing Agreement GDP Gross domestic product

IPCC Intergovernmental Panel on Climate Change JI Joint Implementation

NPV Net Present Value

SAR Second Assessment Report

UNEP United Nation Environmental Program

UNFCCC United Nations Framework Convention on Climate Change US EPA United States Environmental Protection Agency

VER Verified Emission Reduction/ Voluntary Emission Reduction WMO World Meteorological Organization

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Contents

1 Introduction ...2

1.1Background to research ... 2 1.2 Research problem ... 3 1.3 Purpose ... 3 1.4 Research questions ... 3

2

How to evaluate Carbon offsetting ...4

2.1 Carbon offsetting ... 4

2.1.1 Companies providing carbon offsetting ... 5

2.2 Cost benefit analysis (CBA) of carbon offsetting ... 5

2.2.1 CBA and practical decision-making ... 6

2.2.2 Critics of CBA ... 7

2.2.3 Net present value of CBA ... 7

Net Present Value formula ... 8

2.3 Costs and Benefits ... 8

2.3.1 Firm and society wide costs and benefits ... 8

2.3.1.1 The marginal damage cost of CO2 ... 8

2.4 Price elasticity of demand ... 9

3 Case study of Husqvarna AB ... 11

3.1 Husqvarna AB ... 11

3.2 Strategy ... 11

3.2.1 Data Collection ... 12

3.3 Calculations ... 12

3.3.1 Corporative costs and benefits ... 12

3.3.2 Society wide costs and benefits ... 13

3.3.3 Net present value ... 13

3.3.4 Findings of the survey questions for retailers ... 14

3.3.5 Elasticity of demand ... 15

3.4 Case study findings ... 17

4 Conclusion ... 19

5 References ... 21

6 Appendices ... 23

6.1 Myclimate ... 23 6.2 CO2focus ... 23 6.3 Utsläppsrätt.se ... 24

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1 Introduction

About 30 thousand billion tons of carbon dioxide ( ) is emitted worldwide every year, the average world citizen emits 4080kg of annually (Kirby, 2008). The built up human dependence of carbon based energy creates a constant increase of greenhouse gases in the atmosphere. There are many potential effects of emissions such as damages on ecosystems, coastal zones, public lands, recreational opportunities and natural resources forests and the polar regions, decrease in agriculture, water and food supply, sea level rise, adaption to new conditions and extreme events like earthquakes or flooding (US EPA, 2010). All these effects bring costs to the society and by reducing the amount of these costs can be reduced. The record of global temperature shows that since the beginning of the last century, the temperature on earth has increased by about half a degree Celsius and that this trend has become even stronger during the last decades (Naturvårdsverket, 2006). The cause of this increased temperature is considered to be greenhouse gases. With 83.8% of total greenhouse gases, is the most abundant greenhouse gas added to the atmosphere (EIA, 2008).

This thesis will present an environmental alternative for corporations to take responsibility of their emissions through carbon offsetting.

1.1 Background to research

The Kyoto protocol is the foundation of most research which is performed in the area of climate change. The first step towards the Kyoto protocol was taken already back in 1992 in Rio de Janeiro when UN adopted a climate convention. Five years later in 1997 in Kyoto, Japan several countries decided together to reduce their emissions. The convention was taken into effect in February 2005. In large the convention means to reduce emissions of greenhouse gas by 5.2% during the period 2008-2012 compared to the amount released in 1990 (UNFCCC, 2008). The members of the European Union are purposed to reduce their emissions by 8%, individual strategies for each country have been decided in the EU. How much each country will reduce their emissions depends on the structure of the country and how far it has reached with its national environmental work. Further the environmental laws in individual countries are expected to become stronger in the near future. The Kyoto protocol can be seen as a first step towards the climate conventions long term goals (Naturvårdsverket, 2008). The largest country in the world when it comes to greenhouse gas emissions, The United States has not ratified the protocol.

In 2007, the former vice president of the United States, Al Gore and the UN Intergovernmental Panel on Climate Change (IPCC) was rewarded with the Nobel peace prize, “for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change.” (Norska Nobelkommittén, 2007). Al Gore’s book “An inconvenient truth” and the movie with the same name is to a large extent based on the IPCC’s Fourth Assessment Report (AR4) which indicates a strong connection between human activities and climate change (IPCC, 2007a). The concentration of greenhouse gas in the atmosphere is very high compared to the time before the industrialization and this is seen as the biggest reason for the increased

3 temperature on earth. The report is also pointing out that if nothing is done to reduce greenhouse gas emissions now, the change in climate will be larger in the future than it has been during the 20th century.

The IPCC is the leading body for evaluation of climate change, it is based on UNEP, The United Nations Environmental Program and on the WMO, World Meteorological Organization to give the world a scientific view of climate change and its potential consequences. The IPCC do not perform any research on their own, instead they review the most recent scientific, technical, and socio-economic information from all over the world. Thousands of scientists are contributing on a voluntary basis to the work of IPCC.

There are still some researchers who are critical to the statement that climate change is a consequence of human activity. They accept that there has been a rise in temperature but claim that it might just as well depend on natural variations in climate (Kaur, 2008). Some researchers even claim that an increased amount of greenhouse gas in the atmosphere is good for human beings. This is a very small part of scientists and their claims are hard to find in scientific articles which also make them hard to evaluate.

Despite many years awareness of climate change, the topic of carbon offsetting is a rather new issue where limited research has been performed.

1.2 Research problem

With interest in environmental issues and to do something useful, this thesis touches the topic of carbon offsetting and includes a cost benefit analysis (CBA) to be used as decision support for companies with interest to reduce their emissions.

The question of climate change as an effect of emissions have received increased attention with the result that corporations recently have started to think more “green” and to follow the increased demand of environmentally friendly products. Carbon offsetting or making products carbon neutral is a way for corporations to reduce their greenhouse gas emissions. This can be done through several different approaches. Some of the most important are investing in renewable energy, energy efficiency projects and tree planting projects.

1.3 Purpose

The purpose of this thesis is to analyze the social and corporate net benefits of carbon offsetting. The obtained result will be used as a decision support for corporations who consider offsetting their emissions.

1.4 Research questions

 How much will it cost corporations to become carbon neutral?

 How much do emissions cost the society?

 Who are the gainers and who are the losers of carbon offsetting?

 Price elasticity of demand, how much of the offsetting costs can be added on the price of the products without losing customers?

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2 How to evaluate Carbon offsetting

2.1 Carbon offsetting

Carbon offsetting implies that companies voluntarily offsets emissions released from their activities or products. There can be many steps for a corporation to reduce their emissions of greenhouse gases. As a first step a corporation needs to analyze what kind of emissions that are released and by which activities. Subsequently, arrangements should be made to reduce emissions in the best possible way (DECC, 2010).

For corporations who wants to make an additional environmental effort it is possible to offset the remaining emissions through the purchase of offsetting credits. Credits are sold by organizations who offer carbon offsetting such as Myclimate, CO2focus or Utsläppsrätt.se. There are two different approaches for corporations to offset their emissions. The first alternative is to hire an organization which provides carbon offsetting. These organizations generally provide a package deal, they calculate the amount of emitted and supply offsetting credits to compensate for these emissions. Alternatively the corporation itself can calculate its emissions and buy credits to offset. The number of firms that provides carbon offsetting deals to corporations has increased during recent years. Parts of the market lack a control system and several unreliable actors exist. Some of these corporations take unacceptably large mark-ups on offsetting credits, some even more than 100%. This means that only a small part of the amount paid for the credits are really used for concrete activities that reduces greenhouse gas emissions (Swedish Energy Agency, 2009).

Corporations are recommended to buy offsetting credits from the European Emission Reduction Purchasing Agreement (ERPA), or from projects carried out by one of the two Kyoto protocol’s project based mechanisms, CDM or JI. CDM-projects are carried out in developing countries and JI-projects mostly in Eastern Europe. A substantial control is performed for each project and for the reduction units that emerge. In ERPA, each credit amounts in a certain share of the European industry’s limited emission space. In this system each ton of released has to be covered by an EU Allowance. The use of EU Allowances for carbon offsetting implies that the size of the already limited emission space for industrial activities in the system is reduced and that a corresponding reduction must be fulfilled somewhere else in the system (Swedish Energy Agency, 2009).

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Table 1, Reduction units (Swedish Energy Agency, 2009).

Reduction units in UN and EU systems of rules

CER Certified Emission Reductions from CDM-projects (1 CER = 1 ton CO2 -eqvivalent).

ERU Emission Reduction Units from JI-projects (1 ERU = 1 ton CO2-eqvivalent). EUA EU Allowances

European Emission Reduction Purchasing Agreement (ERPA), EU-ETS (1 EUA = 1 ton CO2).

Reduction units from the unregulated market excluded from FN- and EU-systems of rules:

VER Verified Emission Reductions/Voluntary Emission Reductions (1 VER = 1 ton CO2-ekvivalent)

2.1.1 Companies providing carbon offsetting

Several companies who offer carbon offsetting deals for corporations exist in the market. Some of these companies are Myclimate, CO2focus and Utsläppsrätt.se, all with support from United Nations Environment Program (UNEP). These companies offer voluntary carbon offsetting and are non-profit organizations. Myclimate and CO2focus works globally with carbon offsetting projects such as windmill plants in Turkey or solar power plants in India. The projects follow the strictest UN-standards, Clean Development Mechanism, Gold Standard (CDM) and the green house gas protocol (GHG protocol) (Myclimate, 2010, CO2focus, 2009). Utsläppsrätt.se has chosen to work exclusively with EUAs (Utsläppsrätt.se, 2010). emissions can easily be calculated on these companies’ web-pages and converted into offsetting credits. Further information about these corporations is provided in Appendix 1.

2.2 Cost benefit analysis (CBA) of carbon offsetting

One way to evaluate the net benefits of carbon offsetting for corporations and society wide is by the performance of a cost-benefit analysis. The information accomplished by this analysis can be used to compare the alternatives and to decide whether to carry out the project or not. The theory of CBA is consequently specified in order to report the different aspects of the analysis performed later on.

CBA is used to evaluate different alternatives for a project, regulation or another intervention. The method is used to predict and evaluate the consequences of a decision and to be able to rank the options. The calculations of CBA show the difference between the scenarios with or without the project. It can also be a guide to understand and evaluate the value given to different stakeholders throughout the project. If the project is not carried out the resources can be used in an alternative way, the value of this alternative way is the projects opportunity cost (Brown & Campbell, 2003). In a competitive market with no taxes or subsidies, the market price is exactly equal to its opportunity cost of production (Brent, 1997).

6 The process of a CBA includes identification, measuring and comparison of all costs and benefits from an investment or project. It is important to express both costs and benefits in the same units. CBA is a method that evaluates investments or projects in a way that corrects for market failures. There are impacts and values which have no monetary values, these needs to be converted to get a true and correct picture of the study. One type of market failure is externalities, which is when there is no market connection between the person consuming or producing a good and the people that are affected by this product (Perman, 2003). Both private and public projects can be evaluated by a CBA. A private project can have costs and benefits that do not only affect the company but also affect others in the society. For example if a company chooses to offset their emissions the benefits of reduced emission in the atmosphere is spread also to other people in society. There would be no use for CBA if there were no externalities or other distorting effects on the market since resources would already be distributed in the private, individual and society best way. In a non-competitive or distorted market the supply and demand is not the same in equilibrium and therefore they need to be evaluated according to certain rules to find their true value (Brown & Campbell, 2003).

The most important when making a CBA is to address the question and the options under consideration. Further a decision will be made if the project or policy is going to be undertaken at all. The analysis shall proceed if estimated benefits exceeds estimated costs, and do not proceed if estimated benefits fall below estimated costs. It is important to establish what the optimal scale of the project is to get a perspective and an idea about the project. The option with the highest benefits should be chosen and further on a decision must be made when the policy shall get started. It is of importance to decide which policies should be undertaken first and how policies should be ranked in order of importance. The context ought to be established, the issue of scale shall be considered and the alternatives set up (Pearce, 2006).

2.2.1 CBA and practical decision-making

The method of CBA is frequently used by decision makers in order to make a prediction and evaluation of an undertaken project. CBA provides a model of rationality and measures gains and losses. Benefits are defined as increases and costs as reductions in human wellbeing. Social benefits must exceed its social costs, for the project to qualify on cost benefits grounds. A society is the sum of all individuals in the specific area or country. The geographical borders are normally the nation, where you use CBA but it can be extended to wider boundaries (Pearce, Atkinson & Mourato, 2006). In this thesis the society is based on the global population.

CBA is considered as a good method to find out whether it is good for a corporation to offset emissions or not.

7 The analysis implies that you systematically divide the issues into benefits (B) and costs (C) in monetary values and take the benefits minus the costs to get the net benefit (N) (Brent, 2006).

(1)

A CBA approach can be done before or after a decision is implemented. When a CBA is performed before the decision is implemented or under consideration, estimated values are used. When the CBA approach is used after a decision has been implemented, exact values and sunk costs are used. This will affect the results of the CBA (Pearce et al., 2006). In this study we use CBA calculations before the project has been implemented.

2.2.2 Critics of CBA

There are critics and difficulties connected with CBA. One criticism of CBA is that it just considers the total costs and benefits. If costs and profits are unevenly distributed between citizens it is assumed that they withdraw one another. Another difficulty is that there can be disagreements in the work with the analysis, whether for example an effect is a cost or a benefit. Further difficulties can be how the analysis will look like in a time period, how one can value the effects and how a tradeoff between present time and future is made.

CBA is used to rank the evaluated alternatives and finally determine and recommend one of them. The critics have to be taken under consideration in the time of the study, the first mentioned criticism above, the society perspective with external effects, is of great importance in the calculations (Pearce et al., 2006).

2.2.3 Net present value of CBA

The aggregated value today of a series of cash flows occurring in the future is called the Net Present Value (NPV). By looking at the projected cash inflows and outflows the NPV is a way to decide whether or not to invest in a project. If the value of NPV is greater than 0, the project is profitable and worth the risk. If the value of NPV is less than 0, the project is not worth the risk and should not be carried out (Pearce et al., 2006).

Since NPV takes risk and reward into consideration, it is a way to decide if a project is worth to undertake or if an investment is worthwhile. The aimed percentage profit is important because it reveals the minimum return the project or investment must make. Furthermore NPV takes percentage profit into consideration. This means, the value of NPV will change with different percentage profits. At some rates, the project may be worth undertaking and at others, it would not.

Many in the corporate world use NPV in conjunction with other factors before making a final decision.

8 Net Present Value formula

(2)

(3)

Where CFt is the net cash flow at period t, CF0 is the initial cost outlay and i is the cost of capital or the discount rate. (Westerfield Jaffe, 2005)

2.3 Costs and Benefits

To be able to make a comparison between the impacts of climate change and the costs of reducing emissions, it is important to express both sides in the same metric. The reduction costs are usually measured in money which is well suited to measure impacts that affect market transactions and therefore directly affects GDP. To use monetary metric to measure non-market impacts such as human lives is harder but possible. This kind of economic valuation can be controversial and sophistical analyses are required (Pearce, Cline, Achanta, Frankhauser, Pachauri & Tol, 1996).

2.3.1 Firm and society wide costs and benefits

The cost for the firm is the amount it costs to buy offsetting credits to become carbon neutral. This cost depends on what kind of credits the corporation decides to invest in. In the case study performed in this thesis the cost will be calculated based on EUA’s since they have a specified cost. During the period 2009-2012 the average price of EUA’s are estimated at €29 (Point Carbon, 2008). The benefits for the firm are harder to estimate. Through advertising it is possible to strengthen the brand name with a green/carbon neutral profile of the corporation and hence, increase sales.

Society wide carbon offsetting has the same costs as the firm since the firm is a part of the society. The benefits for the society are the effect on society from the reduced emissions due to the compensated amount, the marginal damage cost of carbon dioxide.

2.3.1.1 The marginal damage cost of CO2

The problem when trying to put a value on climate change is that the complicated pattern of local and individual impacts needs to be simplified to a set of indicators, of impacts in different regions, sectors and systems that is possible to summarize and compare in a useful way. To get a sufficient measure that allows for consistent comparison the impact of climate change on the margin needs to be calculated, the effect of a small change in greenhouse-gas emissions. This measure although uncertain and controversial is useful as a benchmark for the policies of emission reduction (Pearce et al., 1996).

The research on economic impact of climate change is still at a relatively early stage and there are still many questions that remain unanswered. One problem with impact evaluation is that the understanding of climate change is still incomplete, particularly the understanding of regional details (Mahlman, 1997). Even though there have been several case studies on the country-level the knowledge of local differences is still too uneven and unclear which makes

9 comparisons hard to perform. Moreover, differences in assumptions also make it hard to compare case studies between different countries. The largest knowledge gap exists on the vulnerability of developing countries, non-market damages, indirect effects, horizontal interlink ages, and the socio-political implications (Tol, 2004).

The question of adaption is also hard to include in an impact assessment. Adaption implies behavioral, technological, and institutional changes at all levels of society. The degree of adaption will differ between different populations groups and regions (Tol, 2004).

There have been several studies on the total impact of climate change in different regions of the world. Differences in assumptions of climate scenarios, assumptions of adaption, included impacts and regional disaggregation makes the results hard to compare. In other words, the current aggregate estimates might underestimate the cost of climate change since they tend to ignore extreme weather occurrence, ignore costs of transition and learning and underestimate the compounding of multiple stresses (Keller, Tan, Morel & Bradford, 2000). On the other hand they might also have disregarded positive impacts of climate change and not sufficiently calculated on how adaption can reduce impacts (Maddison, 2003).

Even though these studies vary a lot there are still some patterns and trends that appear According to Tol (2004) one trend is that the impacts on the market are lower than initially thought and can even be positive in some regions and sectors, mostly in developed regions. On the other hand, under some conditions market impacts can be severe. A fast increase in extreme weather events can result in large losses and costly over-adaption. Since developing countries are depending more upon climate sensitive activities they are also more sensitive to changes in climate. Another point of view is that more weight has been assigned to non-market impacts now than in early studies. Differences of impacts will not only be found between regions, but impacts on individuals, sectors and systems within them will also vary, some will even benefit while other may suffer severe losses. Furthermore the estimations of the global impact of climate change depend on the way figures are aggregated. Since impacts are more severe in developing countries, the more weight put on developing countries the more severe are aggregate impacts.

In UN’s second assessment report (SAR) the marginal damage cost of 1 ton emitted in the near future is estimated at US$5-125 (≈€4-1011). The higher estimates arise from a combination of high vulnerability with low discount rate, most estimates occur in the lower part of the range (IPCC, 2007a).

2.4 Price elasticity of demand

The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. It is used in this thesis to see how much corporations can add to the price of a product without loss in sales.

If the elasticity is greater than 1 in absolute values, there is an elastic demand. The quantity demanded is very responsive to price. An increase in price by 1 percent will result in quantity

1

10 demanded to decrease by more than 1 percent. If the elasticity of demand is less than 1 in absolute value, it is an inelastic demand, changes in price have a relatively small effect on the quantity of the good demanded. An elasticity of exactly -1 implies unit elasticity.

(4)

The average elasticity can be calculated as the ratio of the average price to average quantity (Varian, 2006). When the price elasticity of demand is high (in absolute values) this implies that even a small change in price have a large negative impact on quantity demanded. An inelastic demand implies that the price can be increased without any large impacts on quantity demanded.

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3 Case study of Husqvarna AB

3.1 Husqvarna AB

To get a more applicable work Husqvarna AB was asked to cooperate in this thesis. The case study will be used as decision support to determine if carbon offsetting is of interest for Husqvarna AB. Estimated values from the firm are used in the calculations and the case study consider exclusively the Husqvarna brand.

Husqvarna AB is a well-established corporation with 15.000 employees and a turnover of 34 billion SEK (2009). The first plant was founded in 1689. Today the Husqvarna Group is the world's largest producer of outdoor power products including chainsaws, trimmers, lawn mowers and garden tractors. The Husqvarna Group's products are sold in more than 100 countries and include products for consumers (67%) as well as professional users (33%) (Husqvarna AB, 2010).

Husqvarna AB is for us a local corporation with a worldwide well known brand, which was an essential reason why we choose to make a case study of our thesis in cooperation with them. We contacted and arranged a meeting with the environmental manager at Husqvarna AB in Huskvarna. Together we made a well thought-out strategy.

3.2 Strategy

To investigate if carbon offsetting is a profitable strategy for corporations and the society we make a CBA analysis of carbon offsetting. The carbon offsetting look attentively at the emissions the products emits during lifetime use, recycling of the products such as transports, company cars and lorries, business trips and production etc are not included in the calculations. It is also of great importance to mention that the usage of the product also depends of its owner and his treatment of the product. The data given from Husqvarna AB are average estimated data taken from the engine manufacturer, two-stroke engine manufactured by Husqvarna AB and used to handheld products and four-stroke engine manufactured by various engine manufacturers and used to wheeled walk behind and wheeled ride on products.

The carbon offsetting will be accomplished by the performance of five different stages. To see if carbon offsetting is a profitable strategy, benefits will be compared to the involved costs. Since the study will be a decision support, estimated values are used and the carbon offsetting considers the total emissions during the products lifetime.

The first step is to estimate the total cost for Husqvarna AB to offset all emissions from their production and product use. This is calculated based on estimated data, from year 2009, obtained from Husqvarna AB. Husqvarna AB includes several different brands and this case study focuses exclusively on Husqvarna’s own brand. By multiplying the total amount of emissions by the cost for the equivalent amount of offsetting credits, the total cost to carbon offset all Husqvarna products sold in a year is found.

The second step is to estimate total costs and benefits of emissions and carbon offsetting for the society.

As a third step, the NPV of the project is calculated and we get an estimated value of the costs for carbon offsetting for the company.

12 Fourth, we make a market survey to investigate if there is a demand for carbon-neutral products. A questionnaire is sent to twenty large retailers of Husqvarna products globally and the findings will be concluded in section 3.3.4.

In the fifth step the price elasticity of demand is calculated for chain saws, wheeled walk behind and wheeled ride on, to see the sensitivity of change in price. This is used to see if the offsetting cost can be added to the consumer price.

3.2.1 Data Collection

The Husqvarna products are divided into different product categories. “Handheld”, “Wheeled Walk Behind” and “Wheeled Ride On” are the analyzed project groups.

To get the data needed we got in contact with the product managers for each product category. The product managers provided us with product information about the estimated average quantity of emissions per hour in use, average hours used during product life, number of sold products in 2009 and consumer prices.

Further we order the products in minor groups depending on which products that have the same average emissions per hour. The products which have 0 average emissions per hour and 0 sold products are removed.

The cost for carbon offsetting is based on EU and UN standards.

3.3 Calculations

3.3.1 Corporative costs and benefits

For the first step, to find the estimated total amount of emitted by Husqvarna brand products, we first multiplied emissions emitted, gram per kWh, by engine power, kW, to get the amount of emissions in gram per hour. Further the amount of emissions per hour is multiplied by the number of hours used during product lifetime and the number of units sold of each product. In the second column in table 2 below the total amount emitted for each product category (ton of ) is presented.

Secondly the total amount of emissions that needs to be offset is 1 992 600 ton. The cost for offsetting this amount can differ depending on what kind of offsetting credits Husqvarna decides to purchase. In this case study the cost will be calculated based on EUA’s since they have a specified cost. During the period 2009-2012 the average price of EUA’s are estimated at €29.

As can be seen in table 2 the total cost for offsetting total emissions is estimated to €57 785 000. To calculate the amount per product the sum is divided by the total number of products sold in 2009,1 158 686pcs. This result is presented in the fourth column in table 2.

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Table 2 Amount of CO2 emitted (tons), offsetting cost (€) and cost /product (€)

Category emissions

(ton)

Offsetting cost (€) Total cost/total number of products sold 2009 (€)

Handheld 1 947 000 56 463 000 53

Wheeled walk behind 23 000 667 000 8

Wheeled ride on 22 600 655 000 36

Total 1 992 600 57 785 000 50

For the Husqvarna brand to become carbon neutral €57 785 000, an average of €50 per product needs to be paid.

3.3.2 Society wide costs and benefits

In this case the cost of the society is the cost of the firm since the firm is a part of the society, and the costs are carried by Husqvarna. Since the estimates of society wide benefits are uncertain and the range of estimates is wide this will be calculated on different values. The UN estimated range of €4-101 will be used as a base for this calculation. Three different calculations are carried out, on the lowest, highest and avalue in between.

Table 3, society wide benefits depending on different estimates (€).

Estimated marginal damage cost of emissions

Value of society wide benefits. The value for the society of reduced emissions. (€)

4 7 970 400

29 57 785 000

48,5 96 641 000

101 201 253 000

In table 3 it can be seen that at €4 the society wide benefits will not outweigh the offsetting cost paid by the firm in the society. At the two highest estimates, benefits will exceed the costs. For the benefits to exactly outweigh costs the marginal damage cost of emissions needs to be the same as the cost for offsetting, here estimated at €29 per ton during the period 2009-2012.

3.3.3 Net present value

To estimate the aggregated value today of the future annual offsetting costs, the NPV is calculated.

14 As discount rate the average deposit rate is used: 18.9786/9=2.1087333% calculated from the Riksbank key interest deposit rate 2001-2009 (Riksbanken, 2010). We assume an interest deposit rate of 2.11 % per year and further that the costs of carbon offsetting remains the same over the time period of four years, since the average price of EUA´s are estimated at €29 per ton during the period 2009-2012. To be able to make a comparison what happens if there is a higher deposit rate, a calculation of the NPV with an interest rate of 6 % is made, this interest deposit rate is taken as an empirical example.

CI-219 443 517

CI-200 231 128

Since we cannot estimate a numerical value of cash inflows (CI) we get the present value (PV) of cash out flows for the four following years. To get a positive NPV the cash inflows, over four years, generated by this carbon offsetting project needs to reach above €219 443 517 when calculate with 2.11% interest deposit rate. With a 6% interest deposit rate we get as expected a lower value. Since it is difficult to divine the future and to get a truer answer, a smaller value of interest deposit rate is better to use, because we know that the climate changes will not improve to the better.

3.3.4 Findings of the survey for retailers

A survey is sent globally to retailers of Husqvarna products to see the response from the market of carbon neutral products. The consequent findings of the survey are that the retailers have not noticed an increased demand for carbon neutral products from their customers during the past 12 months. Further, up to 10 % of the customers of the retailers ask about how emission efficient different products are. Considering the average customer's willingness to pay for a climate neutral product, the average is not more than 4% among the customers. On the question on how the retailers can increase their “goodwill” by offering climate neutral products the general answer was that it could be helpful but have very little impact.

A conclusion of the market survey will be that today there is not a high demand/request of carbon neutral products in the market. Partially this can depend on the customers’ insufficient awareness of carbon neutral products and partially it can depend on the intangibleness of the effects of emissions.

Husqvarna AB carried out a market survey in Sweden and Germany during fall 2009, about the interest of environmentally adapted products. Among the participants of the survey were

15 house owners, landscape architects, land operators, and forest workers. The result showed that professional consumers believe that environmental issues are important and that they are strongly engaged in their work environment. It was also found that house owners are interested in environmental questions and that they will require better restrictions on environmental friendly products (Husqvarna AB, 2009).

From this we can conclude that the European market might be better prepared for carbon neutral products than the rest of the world.

3.3.5 Elasticity of demand

To estimate how much of the offsetting cost that can be put on the sales price without too large losses in sales, the price elasticity is calculated. This calculation is carried out for the three different product categories (handheld is replaced by chainsaws to make the estimation more correct) where Swedish consumer prices including taxes is used of Husqvarna brand products in the Swedish market. Since we not calculate on quality controlled products the price elasticity of demand is not totally proper, the curves would probably be flatter. The study give a perspective of the price elasticity of demand, the results can be seen in the graphs below.

Graph 1

As can be seen in graph 1, the slope of the culumative demand curve for chainsaws is -0.017. This value is multiplied by the and the result is inverted to get the price elasticity of demand. The calculations can be seen below.

y = -0,017x + 9630,9 0,00 2000,00 4000,00 6000,00 8000,00 10000,00 12000,00 14000,00 0 100000 200000 300000 400000 Pr ice

Cumulative quantity sold

Cumulative demand chain saw

Price/product Linjär (Price/product)

16

=16.83

An absolute value of 16.83 indicates that the price of the product is elastic. A 1% increase of price reduces quantity demanded by 16.83%. Therefore it is not possible to add a large amount of the carbon offsetting cost to the consumer price due to high losses in sales.

Graph 2

From graph 2 above it can be seen that the slope of the cumulative demand curve for wheeled walk behind is -0.0858. The price elasticity of demand is calculated as below.

= 13.94

For wheeled walk behind products the elasticity were found to be 13.94 in absolute value. A 1% increase of price reduces quantity demanded by 13.94%. Hence, as in the case of chain saws, it is not possible to add a large amount of the carbon offsetting cost to the consumer price. y = -0,0858x + 6998,2 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 0 10000 20000 30000 40000 50000 Pr ice

Cumulative quantity sold

Cumulative demand wheeld walk behind

Price per product Linjär (Price per product)

17

Graph 3

The slope of the culumative demand curve for wheeled ride-on is -3,43. The elasticity is calculated below.

=9.06

For wheeled walk behind products the elasticity were found to be 9.06 in absolute value. A 1% increase of price reduces quantity demanded by 9.06%. Hence it is not possible to add a large amount of the carbon offsetting cost to the consumer price.

The high price elasticity obtained for all three categories implies that already a small price increase give rise to considerable quantity reductions.

3.4 Case study findings

The total estimated cost of carbon offsetting year 2009, including both production and lifelong product usage, for Husqvarna products was found to be €57 785 000 and the PV for four years is estimated at €219 443 517. To reach a profitable corporate carbon offsetting the PV of cash inflows needs to be at least €219 443 517. There are three options to manage the offsetting costs.

The first one is that the corporation Husqvarna AB funds their emissions, pay the entire amount of €57 785 000. Second is that carbon offsetting is added to the price of the product and hence the customer pay the offsetting cost this results in an average price of €50 per

y = -3,43x + 83022 0 20000 40000 60000 80000 100000 120000 0 5000 10000 15000 20000 Pr ice

Cumulative quantity sold

Cumulative demand wheeled ride on

Price/product Linjär (Price/product)

18 product. From the elasticity study above we got the result that even a small increase in price will imply a large reduction in sales. Therefore this strategy is not recommended for Husqvarna. The third alternative is a voluntary option, the customer can choose if he will pay extra to get a carbon neutral product. This will not bring any extra cost for the companies, the customer stand for potential cost, in this case estimated at an amount of €50 per product. If Husqvarna AB will benefit from carbon offsetting depends on the positive marketing effect. Since the survey with the retailers show that the market is not yet ready for carbon neutral products, we suggest the third alternative, let the customer decide to carbon offset or not. This can prepare the market and hence in a near future the demand for carbon neutral products will increase.

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4 Conclusion

Carbon offsetting is a rather new concept, at present there are not many corporations on the market who take advantage of this possibility, but it is better to beat the market before the market beats you. It is now a company can earn “good will” by carbon offsetting, when all companies must do it and it becomes a custom the benefit will decrease because the customer will take it for granted.

For a company to become carbon neutral, it is important to make revisions in their operations in order to minimize emissions. In this revision all operations carried out by the company should be considered. Carbon offsetting should be used as a complement to compensate for unavoidable emissions. The cost for a company to carbon offset their emission depend on which carbon offsetting company it chooses to consult and what kind of offsetting credits they provide.

A company can benefit from a green profile through advertizing, it will stronger their brand name and reputation. Through advertizing and “good will” the company might benefit on carbon offsetting in the long run by increases in sales at the same time as the society will benefit from a healthier environment.

The cost can be paid by the company itself or distributed at the consumer price.

The first alternative is that the company pays the entire offsetting cost. This can pay off if the benefits increase the sales of an amount that cover the costs. The second alternative, companies that have inelastic demand are able to add a part of the carbon offsetting at the consumer price. If carbon offsetting costs adds to the consumer price, the consumer will lose the extra amount paid but society will gain from a cleaner environment. The effect for the company is ambiguous, one possibility is that the sale decreases due to increased consumer price, but on the other hand it can increase sales due to positive marketing effects. A third alternative is for the company to provide an option to the customer to voluntary carbon offset the product. It is up to the customer to choose whether they want to pay the extra amount of money to get a carbon neutral product or not. We found this to be the best alternative for corporations, since it can benefit from a green profile without any additional costs.

The society will gain from all three options since there are no costs involved for the society, there will only be positive effects of carbon offsetting, but the third alternative is the least beneficial for the society since the carbon offsetting amount will probably be less. The society gain is the sum of the reduced damage costs due to reduced emissions,estimated to 4-101 € per ton .

We have also drawn a conclusion from the market survey that the market might not be ready for carbon neutral products due to lack of awareness, ignorance or intangibleness of climate change problems.

To be one step ahead and be one among the first companies with carbon offsetting products will benefit the corporation in the long run, since in the future there will be much stronger laws of emissions and other greenhouse gases.

20 The best thing is to make the product more environmental friendly with reduced amount emissions due to research and development. However the best alternative for the society will be to improve the technology so they emit less .

Today a lot of research is carried out within the area of climate change, a subject which concerns us all, despite this is the area of carbon offsetting yet unexplored. This thesis has just touched upon the tip of the iceberg.

For further studies market adjustments to reduce emissions can be analyzed. An example of market adjustment might be to sell electric products to regions where green electricity is produced and solar cell products to sunny parts of the world. Another interesting part is R&D to improve fuel efficiency, this mean less fuel and less emissions and hence lower costs for the costumer to run their products.

The benefits of carbon offsetting are a difficult area and a more thorough investigation would be interesting.

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6 Appendices

6.1 Myclimate

Myclimate – The Climate Protection Partnership is one of the leading companies when it comes to voluntary carbon offsetting, it is a non-profit organization founded in Switzerland in 2002. All available offsetting projects follow the strictest standards (Clean Development Mechanism, Gold Standard). Myclimate is science-based and market-oriented and offers packages for carbon offsetting. Companies can easily calculate their emissions on Myclimate’s webpage org) by filling in the “company calculator”.

The marginal cost for each project is calculated prior to any commitment of Myclimate for evaluation of additionality. Projects that would have been implemented anyway, or which would only have earned extra profits through Myclimate contributions are not supported. The price per ton CO2 is the difference between fossil and renewable energies technologies divided by the emission reduction over a defined period of time. Each and every project offers different prices per ton CO2 due to the dependency on size, implemented technology, country, etc. Most companies’ purchases portfolios, Myclimate has two different portfolios of different projects to offer and the average price is calculated accordingly. The Myclimate portfolio Gold Standard comprises international projects spread all over the world, the price for this is EUR 24 per ton CO2. When offsetting within the Myclimate Switzerland portfolio half of the emissions are offset in Swiss projects, the other 50% in projects in other countries mounting up to CHF 120 per ton CO2 (≈EUR 86 per ton CO2). For both portfolios, volume discounts for amounts over 1,000 ton CO2 are available.

Myclimate has developed a climate neutral label for especially responsible companies who are striving to reduce their emissions and buy reduction units through Myclimate for unavoidable emissions. The climate neutral label is an approach to communicating the firms’ commitment (Myclimate, 2010).

6.2 CO2focus

CO2focus is an independent international advisory group within voluntary action on climate change. They are the leading company within climate management in the Nordic region with about 150 Nordic corporations on their customer list who altogether have purchased about 75000 CERs.

24 CO2focus provides climate management services such as carbon trading, management consulting, engineering, sales and marketing. They are specialized in the development of efficient tools to enable a systematic work on climate management. Guidelines and methods are gathered from the UN-report “Kick the habit- A UN guide to climate neutrality”, (2008). Efficient climate management demands a well established climate report of firm operations. The model used by CO2focus is based on the international standard for greenhouse gas protocol initiative, (the GHG-protocol) which is the most important international standard for measurement of greenhouse gases. Climate neutrality can imply a climate neutral organization, a climate neutral activity or a climate neutral product. In the case of a climate neutral product the whole life cycle of the product needs to be taken into perspective.

CO2focus are specialized in selling CER-credits which are part of the Clean Development Mechanism). By the purchase of one CER-carbon credit (1 ton ) one specific project which reduces emissions of greenhouse gases is supported. Furthermore the development in the actual country, region or village is also supported.

Only premium projects such as renewable energy based on biomass, solar, wind or geothermic power are implemented.

For clients to be able to communicate their contribution, different climate neutral labels have been developed. All clients that go through the carbon management process, emissions have been measured for all operations, identification of reduction and offsetting of remaining emissions, receives a CO2focus Climate certificate. When emissions are reduced to net zero the client receives the certificate for either a product, a service or the entire organization, this also allows them to use the correct climate neutral label for communication (see picture below) (CO2focus, 2010).

6.3 Utsläppsrätt.se

Utsläppsrätt.se is run by the non-profit organization Emisso and is a provider of carbon offsetting based in Sweden. It was founded in 2006 and was then one of the first companies in the Swedish market to offer climate compensation. Utsläppsrätt.se has chosen to work exclusively with EUAs for their credibility and ease of use and because the emissions reduced by EUAs are in industrialized countries which are where emissions are highest. Emission allowances are sold from EU-ETS in order to help customers to become carbon neutral. Utsläppsrätt.se is a participant of UNEP-Climate Neutral Network since 2008 which is a part of UN’s Environmental Program (Utsläppsrätt.se, 2010).