The Transparency of Industrial Energy Management

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Examensarbete i Hållbar Utveckling 89

The Transparency of Industrial Energy Management

Alexander Robert Campbell

Uppsala University, Department of Earth Sciences Master Thesis E, in Sustainable Development, 30 credits

Printed at Department of Earth Sciences, Master’s Thesis

E, 30 credits

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Examensarbete i Hållbar Utveckling 89

The Transparency of Industrial Energy Management

Alexander Robert Campbell

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The Transparency of Industrial Energy Management Alexander Robert Campbell

Supervisor: Cecilia Mark-Herbert

Swedish University of Agricultural Science Department of Economics

Evaluator: Roger Herbert

Uppsala University

Department of Earth Sciences

Examiner: Malgorzata Moczydlowska-Vidal

Uppsala University

Department of Earth Sciences

Credits: 30 ECTS

Course title: Degree Project in Sustainable Development Course code: 1GV038

Programme/Education: M.Sc. Sustainable Development

Place of publication: Uppsala, Sweden Year of publication: 2012

Cover picture: Coal fired power plant on the outskirts of Lhasa, Tibet. By Alex Campbell.

Key words: Sustainable development, climate change, transparency, energy management, standards, ISO 50001

Uppsala University

Faculty of Science and Technology Department of Earth Sciences

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Acknowledgements

I would like to thank Alan AtKisson for commissioning this thesis, his understanding of the forces at play proved incredibly insightful. I would equally like to thank my supervisor, Cecilia Mark-Herbert who provided tremendous help in terms of structuring my thoughts into a coherent narrative. I am also indebted to my friends and family who supported me throughout the eight months it took to write this thesis. Last and certainly not least, I would like to than the citizens of Sweden for providing me with this education, it is truly appreciated and I promise to make good use of it.

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The Transparency of Industrial Energy Management

ALEXANDER ROBERT CAMPBELL

Campbell, A.R., 2012: The Transparency of Industrial Energy Management. Master thesis in Sustainable Development at Uppsala University, 1R82 pp, 30 ECTS/hp

Abstract: Previous empirical evidence has elaborated on the reasoning behind corporations voluntarily disclosing information relevant to their environmental and social impacts. However, little research has been done on a subset of environmental performance, namely the consumption, efficiency and management of energy.

Energy management is the internal corporate process governing the emission of greenhouse gases in the private sector and is therefore of paramount importance for mitigating climate change. To resolve this lack of knowledge, this thesis builds on past studies to understand the transparency of energy management in carbon intensive industries. The data set chosen for analysis represents 76% of all emissions disclosed by Fortune 500 companies and 5.7% of all anthropogenic emissions. The goal is to provide an overview of the transparency of industrial energy management of carbon intensive firms, based on the how they communicate externally. The thesis also analyses the driving force behind disclosure; whether the companies in question try to legitimize themselves for masking poor performance, or if they perform relatively well and want to signal this in the marketplace. Furthermore, the value of energy management standards such as ISO 50001 is discussed as a means of social coordination in accordance with the theory of ‘New Governance’. Overall it was found that companies in the dataset that emit more absolute carbon were generally more transparent than those who emitted less, while companies that were less carbon intensive tended towards greater transparency. Therefore pre-established theories are not supported when using absolute emissions as a metric for performance. However, when using carbon intensity as a performance metric it shows that those who disclose more information tend to do so to signal their good performance as opposed to legitimizing their poor performance. Standardization of reporting and business practices are seen as tools to help promote transparency while simultaneously improving the performance of carbon intensity, but not necessarily absolute emissions. It is suggested that standardization of energy management can reduce the carbon footprint per firm, but in terms of mitigating climate change it is only appropriate when used in parallel with other policies that place a cap on total emissions. Therefore, social coordination in terms of hierarchies (both international and domestic), market mechanisms and standardization is required in order to curb climate change, and must complement each other accordingly.

Key words: Sustainable development, climate change, transparency, energy management, standards, ISO 50001 Alexander Robert Campbell, Department of Earth Sciences, Uppsal University, Villavägen 16, SE-75236 Uppsala, Sweden

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The Transparency of Industrial Energy Management

ALEXANDER ROBERT CAMPBELL

Campbell, A.R., 2012: The Transparency of Industrial Energy Management. Master thesis in Sustainable Development at Uppsala University, 1R82 pp, 30 ECTS/hp

Summary: Scientists say, and governments agree, that climate change due to human activities will cause numerous problems in the future for the planet, animals, plants and people. It is therefore clear that measures need to be taken in order to reduce the amount of greenhouse gases being emitted. As electrical utilities and industry account for such a large portion of these emissions, they have been coming under increased public pressure. Energy management is the internal industrial process that controls how much a company pollutes in terms of greenhouse gases, and our understanding of it is based only on information that the companies voluntarily decide to share with us. The reason it is important to understand the state of industrial energy management is because fully informed stakeholders can make better decisions, and this can act as a way to control emissions independent of governments. Previous studies have provided the methods to determine how transparent a company is in terms of environmental footprints, and have even developed some theories on the driving force behind the voluntary disclosures. This thesis uses the same methods to see if the theories hold true for energy management as they did for environmental footprints. One theory state that a company performing relatively well in terms of emissions will disclose information to the public that shows how much better they are than the poor performers, essentially showing off how good they are. The other theory states that poor performers want to legitimize their operations and disclose information that makes them look good, even when they are not. Overall this thesis found that companies studied that emit more (absolute emissions) relative to the others were generally more transparent, while companies that were less carbon intensive were more transparent as well. Therefore pre-established theories are not supported when using absolute emissions as a metric for performance. Standardization of reporting and energy management are seen as tools to help promote transparency while simultaneously improving the performance of carbon intensity, but not necessarily absolute emissions. This suggests that they are only appropriate when used in parallel with other policies that place a cap on total emissions. Therefore, social coordination in terms of hierarchies (both international and domestic), market mechanisms and standardization is required in order to curb climate change, and must complement each other accordingly.

Key words: Sustainable development, climate change, transparency, energy management, standards, ISO 50001 Alexander Robert Campbell, Department of Earth Sciences, Uppsal University, Villavägen 16, SE-75236 Uppsala, Sweden

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Abbreviations

BAT Best Available Technology BPT Best Practice Technology CAI Content Analysis Index

CARMA Carbon Monitoring for Action http://www.carma.org

CDP Carbon Disclosure Project http://www.cdproject.net

CEO Chief Executive Officer CSR Corporate Social Responsibility

DJSI Dow Jones Sustainability Index http://www.sustainability-indexes.com/

EMS Environmental Management System EnMS Energy Management System GDP Gross Domestic Product GHG Greenhouse Gases

GRI Global Reporting Initiative http://www.globalreporting.org

IEA International Energy Agency http://www.iea.org

IMF International Monetary Fund http://www.imf.org

IPCC International Panel on Climate Change http://www.ipcc.ch

ISO International Organization for Standardization http://www.iso.org kWh kilo-Watt hour

MJ Megajoule

MWh Mega-Watt hour

mt Metric ton

NGO Non-Governmental Organization

NOAA National Oceanic and Atmospheric Administration http://www.noaa.gov OECD Organization for Economic Cooperation and Development http://www.oecd.org PSAC Petroleum Services Association of Canada http://www.psac.ca TRI Toxic Release Inventory

R&D Research and Development SD Sustainable Development

UN United Nations http://www.un.org

UNFCCC United Nations Framework Convention on Climate Change http://www.unfccc.int UNIDO United Nations Industrial Development Organization http://www.unido.org US$ United States Dollars

WBCSD World Business Council for Sustainable Development http://www.wbcsd.org WCED World Commission on Environment and Development

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1. Introduction

The carbon dioxide released from burning fossil fuels to extract energy for work was formally recognized as causing ‘the greenhouse effect’ over a century ago (Arrhenius, 1896). Since the Industrial Revolution in the mid-19^th century, climate modelers estimate that global annual temperatures have increased by approximately 1 to 1.5ºC (Jones, New, Parker, Martin, &

Rigor, 1999, p. 177; Mann & Jones, 2003, p. 5-3; IPCC, 2007, p. 31; NOAA, 2012, p. 1). This change in temperature has come at a price to the environment in terms of sea level change, increased ocean acidity, decreased ice cover at the poles, and changes in precipitation across the globe to name a few (IPCC, 2007; Rockström, et al., 2009). With annual carbon emissions increasing exponentially (IEA, 2011), global temperatures are expected to increase between 0.5º and 6.4ºC over the course of the 21^st century (IPCC, 2007, p. 45). This in turn will cause increasing pressure on the economy, society and biodiversity, especially on the people and areas most vulnerable to change. In order to limit climate change, 141 countries ratified the Copenhagen Accord in 2009 through the United Nations Framework Convention on Climate Change (UNFCCC), agreeing that: “…the increase in global temperature should be below 2 degrees Celsius, on the basis of equity and in the context of sustainable development, enhance our long-term cooperative action to combat climate change” (UNFCCC, 2009, p. 5).

In order to achieve the 2ºC climate change ceiling, it is important to understand the mechanics of energy use and subsequent Greenhouse Gas (GHG) emissions. World leaders have recognized the dilemma that energy consumption needs to increase if countries are to develop; yet if fossil fuels are used, climate change will accelerate. The Organization for Economic Cooperation and Development (OECD) (2012, p.3) baseline scenario predicts that by 2050 fossil fuels will account for 85% of the fuel mix, thereby leading to a 50% increase in GHG emissions. One way to alleviate the increase in fossil fuel use and subsequent GHG emissions is to focus on energy efficiency for goods and services produced in the economy.

At the Rio +20 United Nations (UN) Conference on Sustainable Development that took place in June 2012, countries agreed on article 128 of the document “The Future We Want”, which states:

“We recognize that improving energy efficiency, increasing the share of renewable energy and cleaner and energy-efficient technologies are important for sustainable development, including in addressing climate change. We also recognize the need for energy efficiency measures in … the production of goods and services and the design of products. We also recognize the importance of promoting incentives in favor of, and removing disincentives to, energy efficiency and the diversification of the energy mix, including promoting research and development in all countries, including developing countries.” (UN, 2012, p. 24)

In April 2012, the International Energy Agency (IEA) published a series of recommendations to energy ministers in the 25 most carbon intensive countries, responsible for 80% of the world’s energy consumption (IEA, 2012, p. 7). If the IEA recommendations are followed, they suggest it could lead to a 50% reduction in GHG by 2050 using 2010 emissions as a baseline. They claim that industrial energy efficiency accounts for a 23% share of reduction potential and shows “improvements but more effort needed” (IEA, 2012, p.6). Electrical utilities have a 36% share of GHG reduction potential, for which coal and nuclear power are

‘not on track’. Furthermore, they claim that there are significant advances that can still be

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made in industrial energy use and electricity production, as there is a lot of untapped potential (IEA, 2012, p.5). This untapped potential comes in the form of installing Best Available Technology (BAT), but also simply in terms of managing their energy in a more efficient manner (UNIDO, 2010; ISO, 2011).

Whether for the use of international/domestic mandates to reduce carbon emissions, or for profit maximization from a corporate point of view, industry and utilities have the incentive to voluntarily manage their energy and subsequent emissions for numerous reasons. Companies may pursue energy efficiency improvements for operational reasons such as finding cost effective solutions to bring their products to market (Cronin, Smith, Gleim, Ramirez, &

Martinez, 2011). For example, in 2008 the company DuPont invested 50 million United States Dollars ($US) in energy saving technology, and the payback period was only 12 months, after which they netted significant savings (Cronin, Smith, Gleim, Ramirez, &

Martinez, 2011, p. 163). Another example is how Dow Chemical saved $4 billion US worth of energy between 1994 and 2005 (McKane, Scheihing, & Williams, 2008, p. 3). Companies may improve energy efficiency for marketing reasons, by looking for ways to differentiate themselves from their competition based on environmental performance, thereby increasing their margins and/or market share (Khanna, 2001). They might also do so for strategic reasons, such as decreasing the risk associated with governments imposing mandatory emission trading schemes (Sinclair, 1997). The move to energy efficiency can also be embedded in politics, such as upholding legitimacy and social pressure from stakeholders (Solomon & Lewis, 2002).

Industry and utilities account for 61% of GHG emissions worldwide (IEA, 2011, p.9) and numerous studies have shown that there are significant gains that can be made in terms of energy efficiency (IEA, 2007; McKane, Scheihing, & Williams, 2008; Worrell, Bernstein, Roy, Price, & Harnisch, 2009). With the adverse effects of climate change already occurring, industrial operations are therefore coming under increased scrutiny. Yet, as energy use and profits are proportional, corporations have the incentive to increase their energy efficiency.

The question that then arises is: to what extent are improvements in energy management for industry and utilities occurring? This in turn relies on the amount of information regarding their internal operations they choose to publish in their annual reports, their sustainability reports and on their websites.

A recent advance in increasing energy efficiency was the release of the ISO 50001 Energy Management Standard (EnMS) in 2011 by the International Organization for Standardization (ISO). If a company adopts and implements the standard, it shows that an internationally recognized process is being followed. However it does not necessarily ensure that there will be a positive result in terms of decreased absolute emissions. The standard claims that it will lead to increased transparency (ISO, 2011, p.3) but the exact mechanisms by which this will happen are not fully mapped out. Sustainability reporting has also undergone a standardization process in the past decade (CDP, 2011; GRI, 2011), however it is unclear to what extent this covers energy matters. Thus, a detailed look at the state of industrial energy management is not readily available.

Previous empirical studies have shown links between the level of transparency, the types of disclosures and environmental performance (Ingram & Frazier, 1980; Wiseman, 1982; Patten, 1991; Bewley & Li, 2000; Patten, 2002; Al-Tuwaijri , Christensen, & Hughes II, 2004;

Clarkson, Li, Richardson, & Vasvari, 2008; Prado-Lorenzo, Rodriguez-Dominguez, Gallego-

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Alvarez, & García-Sánchez, 2009; Clarkson, Overell, & Chapple, 2011; Cho, Guidry, Hageman, & Patten, 2012). These studies developed a series of theories that tried to determine the driving force behind the disclosures. However, to date little attention has been given to a subset of environmental issues; namely energy performance and its relation to transparency and disclosures. Various theories exist for the corporate reasoning behind voluntary disclosures; attributing the level of transparency to either sociopolitical or economic pressures. This thesis investigates these theories in order to see if the same links can be drawn for energy performance as for environmental performance.

1.1 Research questions

The overall goal is to understand how industry communicates energy management processes and results to the public and to see if there is a relationship between transparency and performance. Furthermore, this information can be used to infer if standardization of business process and reporting can ultimately lead to decreased emissions. The particular questions that this paper seek to answer are the following:

 To what extent do the world’s most profitable carbon intensive companies make energy management information readily available to the public?

 Based on pre-established theories for voluntary environmental disclosures, can the motivation behind voluntary energy disclosures be determined?

 Is it possible to infer how the standardization of reporting and energy management can serve as a means to decrease emissions through the promotion of transparency? If so, what forms of cooperation are needed between actors to ensure success?

1.2 Outline

The outline of the thesis is shown in fig. 1:

Figure 1: Flowchart of thesis structure

The paper is be structured as follows: firstly, the problem is placed in the context of climate change and the establishment of frameworks to mitigate it. This provides the basis to understand the importance of energy management, while paving the way for the aim and research questions.

Introduction Problem

Background Method Theory Results Analysis Discussions Conclusion

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The problem background consists of an academic literature review to place the problem in the context of social coordination, governance, corporate social responsibility (CSR), environmental accounting, and stakeholder theory. Historical examples of decentralized regulatory mechanisms are outlined.

The methods section is split into two parts. The first explains how transparency and performance are treated in this thesis and these are scrutinized to spell out delimitations. This section also includes the criteria for analysis i.e. the process for selecting the unit of analysis, the quality assessment of data, as well as critical aspects of the analysis. The indicators used for the content analysis index are outlined and the reasons for why they were chosen are given, as well as the sectoral benchmarks for energy performance.

The theory section is split into three parts. The first discusses the theory behind sustainable development. The second presents terms and models that link transparency and performance, providing two pre-establish theories (economic vs. sociopolitical) that are investigated in the analysis section. The last part looks at theories behind the standardization of reporting and energy management.

The results section consists of a score out of 100% for both transparency and performance for each company, as based on the methods presented and the background empirical data. The data is aggregated and shows the distribution of the indicators when grouped into various categories and types.

The analysis section contains a descriptive statistical treatment of transparency and efficiency to find trends between the two based on the objectivity of disclosure items, the sector the companies operate in, the relative volume of emissions and process or results based indications of transparency. The results are also compared to metrics used by other organizations to measure transparency/performance.

In the discussion chapter, the outcome of the results and subsequent analysis are compared to the papers introduced in the theory section. It also includes a discussion whether the trends between environmental transparency and performance hold true for energy as well. A gap analysis is then conducted to show how organizations working in transparency and standardization can better coordinate to mitigate climate change in carbon intensive industries in the private sector.

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2. Problem background and literature review

This chapter gives an overview of the problem, based on an academic literature review. The purpose is to contextualize the problem in light of current sustainable development issues.

The method used for the literature review can be found in the chapter ‘method’. The

‘discussion’ chapter places the results and analysis of this thesis in to the themes presented here.

As we live in a world with finite resources, it has been argued that there are limits to growth and that it is impossible to continue using resources (especially fossil based energy) the way we have since the industrial revolution (Meadows, Randers, & Meadows, 2004). These limits are based on the ability for the planet to maintain stable operating conditions, and if certain biophysical thresholds are transgressed through human interference, the consequences may be disastrous (Rockström, et al., 2009). Climate change has been singled out as having already exceeded the biophysical threshold and this is expected to: “…threaten the ecological life- support systems that have developed in the late Quaternary environment, and would severely challenge the viability of contemporary human societies” (Rockström, et al., 2009, p. 473).

‘Peak oil’ theory states that humanity is running out of easy-to-obtain sources and that in the future more energy needs to be expended in order to get oil/gas out of their reservoirs, leading to decreased fossil based energy availability over time (Aleklett & Campbell, 2003). Other studies claim that there is enough energy available for the future, but that innovative energy strategies need to be developed to ensure energy security while minimizing the impact on climate (Holdren, 2006). There is much uncertainty in this field, however what has been shown is that regardless of how much fossil fuel is available, changes are needed in the way natural resources are managed in order to build resilience to climate change (Thompkins &

Adger, 2004).

To build this resilience, and to stay within the biophysical thresholds that provide our life- support systems, social coordination is required. Governance plays a key role in this process, as authority needs to be established and exercised in order to control/manage the problem.

2.1 Social coordination and governance

As climate change is a trans-boundary issue that affects everyone on earth in some way, it is therefore of clear importance that social coordination is required. In the book “World of Standards” by Brunsson & Jacobsson (2000, p. 21) three methods by which humanity can interact, co-operate and communicate over large distances regardless of shared values are demonstrated: by hierarchical structures (such as formal organizations), by markets and by adhering to standards. What all three forms have in common is their ability to control and alter status quo behavior. These can also be seen as basic societal institutions as they include patterns of belief, action and rules. If individuals share the same values, it then makes it easier to work towards a common goal and ‘normative communities’ can develop (Brunsson &

Jacobsson, 2000).

An example of a normative community developing was seen at the UN Conference on Environment and Development (also known as the Earth Summit), in Rio de Janeiro in 1992.

It was here that politicians agreed that the energy we derive from burning of fossil fuels and the subsequent GHG they emit have adverse affects to the climate, 96 years after it had first been postulated (Arrhenius, 1896). The culmination of this conference was the treaty of the

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UNFCCC (UN, 1992), ratified by 195 countries (UNFCCC, 2012, p.1), which calls on governments to stabilize carbon emissions in order to minimize the impact to climate systems and the economy (UN, 1992). Although this treaty is legally non-binding, it provides protocols that allow for mandatory emission limits, which governments can pledge to uphold.

This forms a hierarchical structure through which GHG can be managed more efficiently.

In 1995 the signatories of the UNFCCC agreed that the initial treaty were inadequate, which set the stage for the Kyoto Treaty (UNFCCC, 2012). The treaty called for 37 industrialized countries, as well as the European Union (known collectively as Annex I countries), to establish binding targets for climate change to be met by 2012 (UNFCCC, 1998). It was argued that Annex I countries emit the majority of the greenhouse gases and thus had

“common but differentiated responsibilities” (UNFCCC, 1998, p.9). As well as establishing targets, Article 2 of the protocol called on all signatories to establish national policies to improve energy efficiency and research renewable forms of energy. The treaty also established markets based mechanisms for GHG control through Clean Development Mechanism, Joint Implementation and carbon trading (Hepburn, 2007).

This list of regulatory tools for the promotion of social coordination provided by Brunsson &

Jacobsson (2000) is not exhaustive, and there are other frameworks that can be interwoven to understand the larger picture. ‘New governance’ encapsulates numerous alternatives to top- down policies in that the role of public administration is changed to resolve social problems (Lee, 2003). In a study of the various definitions of ‘new goverance’, Rhodes (1996, p. 660) defines four characteristics that they all share:

1.) Interdependance, as state and non-state stakeholders are involved yet governance involves them both.

2.) Continual interaction as resources need to be exchanged and purposes are shared.

3.) Game-like interactions where all players agree on the rules and trust can be built 4.) Autonomy from government, as the networks built are self-organizing. The

government can only ‘steer’ the the network indirectly.

Having established the charcteristics, Rhodes (1996) then goes on to argue that this ‘new governance’ can compliment hierarchies and market mechanisms and that various forms of social coordination not need be mutually exclusive. Many forms of cooperation may appear at first sight to be in opposition to others, yet when looking closer they actually have a lot in common. An example of this comes by looking at the level of government involvement and assuming that hierarchical top-down ‘command and control’ is the polar opposite of self- regulating industries through markets for example. This is a fallacy, not a dichotomy, because industries may decide to self-regulate preemptively, such that they have more freedom to operate without the prospect of future government regulation (Sinclair, 1997; Folke, Hahn, Olsson, & Norberg, 2005). Therefore, government regulation can act as an indirect means to drive self-regulation. Alternatively, command and control may require ‘volunteerism’ on the part of the companies involved, as the government may not be able to monitor and enforce all of the laws, and the companies know this but are still willing to comply (Sinclair, 1997).

A question that arises out of the discussion about the characteristic of interdependence in global governance is whether civil actors can be representative and accountable (Bäckstrand, 2006). This is why governance often involves the themes of legitimacy, accountability, effectiveness and participation (Folke, Hahn, Olsson, & Norberg, 2005, p. 449; Bäckstrand, 2006, p. 468). Furthermore, transparency is seen as a key to understanding the themes, as

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proper knowledge is required for stakholders to enforce global governance through public scrutiny (Stavins, 1997).

Bringing together the work on social coordination (Brunsson & Jacobsson, 2000) and ‘new governance’ (Rhodes, 1996), it becomes clear that there are a multitude of potential solutions that can be reached through vacrious means. The geographical scale can be broken down from international, to national, even to a community level. It can also be seen on a scale of decreasing government involvement, from international, to domestic, to decentralized to self- regulating. Specifically in relation to climate change, policies can adopt numerous forms and it is important to understand what can be done legislatively in order to mitigate GHG. The following section elaborates on the policy toolkit that exists for managing climate change through traditional governance.

2.2 Climate change policies

In order to tackle climate change, a number of policy instruments and frameworks have been developed to achieve specific goals. These can be categorized as either domestic or international, ‘command and control’ or ‘market based’ (Stavins, 1997). This fits in line with social coordination in that hierarchical structures are set up, market based mechanisms can be put in place and standards applied. On the international scale, a range of policies can be seen in fig. 2:

The Kyoto Treaty established three flexible market-based mechanisms known as Emission Trading, Joint Implementation and Clean Development Mechanisms (Hepburn, 2007), as well as setting national emission limits and targets.

Although these mechanisms are expected to contribute to the mitigation of greenhouse gases, the extent to which they will is questionable. The value of Emission Trading in 2006 accounted for only 1% of global emissions and it has been suggested that in order for it to cause a significant impact, the value of the market will need to expand exponentially over time to levels of net flows equaling $40bn US per year (Hepburn, 2007, p. 378). There has also proved to be uncertainty in terms of setting binding targets for emissions reductions;

International Policies

Command &

Control

Uniform Energy Standards

Fixed National Emission Limits

Market Based

Charges, Fees &

Taxes Tradable Rights

Figure 2: International climate change policies (Stavins, 1997, p. 298)

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Canada recently withdrew from the Kyoto Protocol as they had not met their targets and would have had to pay $14bn US in penalties (CBC, 2011, p.1). In the past few years there have been even more complications as international agreements have not been developed that ensure the continuation of existing policy architectures (Driesen, 2011). At the UNFCCC organized meeting in Copenhagen in 2009, countries agreed to ‘pledge and review’, but failed to agree upon the exact mechanisms by which this would happen. The establishment of a global scale ‘normative community’ for climate change can be seen as a major advance in social cooperation, as all parties can agreed on shared values. While it may be possible to rely on most countries to uphold their commitments and for carbon markets to expand exponentially over time, there are nonetheless inherent risks involved. To ensure that GHG emissions reduce, it is therefore of the utmost importance to understand the mechanisms by which this can occur, how they inter-relate, and how to coordinate society to ensure success.

In terms of the establishment of hierarchical structures for social coordination on a national scale, the Kyoto protocol calls for countries to establish domestic policies. Examples of these domestic policies are shown in fig.3:

Figure 3: Domestic policy instruments to combat climate change (Stavins, 1997, p. 297)

Since the Earth Summit, individual countries have developed a variety of different domestic policies to limit climate change, including carbon taxes in Scandinavia (Baranzini, Goldemberg, & Speck, 2000) or the subsidizing of small-scale solar power cells across Germany (Voss, Kiefer, Reise, & Meyer, 2003). Yet for every policy that has succeeded, there have been numerous that have failed. Implementing domestic policies can be problematic because countries have more incentive to do so only if they see potential benefit for themselves (Stavins, 1997). Policies that limit fossil based energy consumption in the short run can be difficult to pass in a democratic capitalistic political-economy, as the consequence of current actions are not felt for a long time. This implies that a very low discount rate would need to be applied, and even so, the net present value of the policy may be negative (Jorgenson, Goettle, Wilcoxen, & Ho, 2008). From a political point of view, any party that builds their environmental platform on a policy that leads to short term losses could risk losing the next election. This would suggest that policies that work best involve win/win projects with a positive net present value while cutting emissions, preferably with short payback periods, such as increasing energy efficiency.

An example of a domestic policy that as of yet has failed to be implemented is ‘Cap and Trade’ in the United States of America, which would have established a ceiling on all emissions and then set in place market mechanisms to trade the rights to pollute. President

Domestic Policies

Command &

Control

Energy Efficiency Standards

Voluntary Agreements

Product Prohibitions

Market Based

Charges, Fees

& Taxes

Tradable Rights

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Obama promoted this policy when he first took office, but after much deliberation in congress it was declared dead in the form it initially took (The New York Times, 2012). That being said, the barriers to implement various domestic climate change policies can vary according to geography and ideology, as with the establishment of ‘Emission Trading System’ in the European Union, which uses similar mechanisms to ‘Cap and Trade’ in the US (European Commission, 2010). The advantage of these types of systems is that they complement the international agreements, as the pledges made in Kyoto or Copenhagen can be linked to the emissions ceilings in the domestic policies. Clearly, the differences between collective will amongst and between nations can make or break a policy, which calls into question whether one size fits all solution can even exist (Sinclair, 1997). It is clear that a variety of methods should be implemented simultaneously to achieve the goal of maintaining or even increasing current levels of energy use while decrease carbon emissions to the atmosphere.

There are further complications that arise when the international and domestic policies try to determine the target by which they aspire to decrease emissions. These targets must be linked to standardized metrics that are comparable on similar scales between emitters. These targets generally fall into two categories: carbon intensity and absolute emissions (CDP, 2011).

Carbon intensity means that a specific metric linked to production or consumption is chosen, such as tons GHG/Gross Domestic Product (GDP) on a national scale, or GHG/unit produced for a firm. The same can be done for energy consumption, such as megajoule (MJ) consumed per unit produced (UNIDO, 2010). Absolute targets on the other hand relate to the gross emissions from a set boundary, be it within a country, or within a firm. In terms of international agreements, absolute emission caps have been chosen, as it is intuitive that overall emissions need to decrease in order to stop the climate from changing. However on a national level, public administrators in some countries who did not ratify the Kyoto protocol have decided to opt for intensity targets based on GHG/GDP instead (Pizer, 2005). Numerous arguments have been made for both targets, with some even arguing that they can be the same given perfect certainty in a given market (Wing, Ellerman, & Song, 2006). This is still an area of fierce debate in the climate change community. Absolute emissions need to decrease to limit climate change, and this can be achieved through decreasing carbon intensity as long as more emissions aren’t being produced overall. These intricacies are essential in understanding how international, domestic and corporate level GHG emissions are tackled. For the remainder of the paper, when the term carbon performance or energy performance is used, it will relate to both absolute and intensity performance unless otherwise specified.

The policies described above show that mitigating GHG is not without its problems. There are numerous tools available, however many of them have shortcomings and one-size fit all solution may not be possible to implement. An element that GHG mitigation is contingent on is the need to base decision-making on verifiable and quantifiable data. The chance of success of any form of governance based on faulty information is low. The following section elaborates on the role of transparency and reporting for GHG in the private sector.

2.3 Transparency and reporting

The importance of transparency in sustainability reporting has recently been singled out by the UN in the document “The Future We Want”; the outcome of the Rio +20 Conference on Sustainable Development. Article 47 of the text states:

“We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider

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integrating sustainability information into their reporting cycle. We encourage industry, interested governments and relevant stakeholders with the support of the United Nations system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account experiences from already existing frameworks and paying particular attention to the needs of developing countries, including for capacity- building.“ (UN, 2012, p. 8)

Stakeholder analysis provides a key to understanding the importance of transparency.

Measures are taken in industry in order to identify requirements for regulation or to promote decreased use of fossil fuels (Dingwerth & Eichinger, 2010). Transparency can be seen as a spectrum, with one extreme end being that the companies release no information on sustainability at all. On the other extreme is ‘Radical Transparency’, which Goleman (2009) introduces with the purpose of making decision-making more public. The concept is meant to be ex-ante not ex-post; decisions that are potentially harmful to the environment, such as excessive fossil based energy use, should be made before the carbon is emitted, not after the fact. Goleman (2009) argues that if consumers have full information of what a company is doing, not just what is externally communicated, then the companies will be fully accountable for their actions and consumers could choose whether they buy from what they perceive to be socially responsible companies or not. Companies would not be able to control their reputation as they do now. As the name suggests, this is a radical point of view, and companies will not likely be willing to increase their risk to this level. With the two extremes of transparency being set, naturally the truth lies somewhere in the middle. Although it may seem that striving for radical transparency could be a potential goal for society, the likelihood of it happening is probably slim. The solution therefore lies in finding a level of transparency that benefits all stakeholders while simultaneously mitigating climate change.

Corporations may also find that there are benefits to being transparent with their internal business processes and their emissions as corporate energy management can be seen in the larger context of CSR. Initially, CSR and especially its reporting was seen as an ethical obligation for companies to do what they can to reduce negative societal and environmental impacts of their business transactions (KPMG, 2011). But there has been a paradigm shift in recent times that has changed this perception of CSR. Sustainability can be seen as a key driver for innovation; it is leading a transformation of competition amongst players that minimizes environmental impact while simultaneously yielding higher returns (Nidumolu, Prahalad, & Rangaswami, 2009). In terms of energy management this can clearly be seen, as companies who minimize energy consumption provide their service or product in a more cost effective manner.

The accounting company KPMG (2011) has provided a very comprehensive overview of CSR/sustainability reporting over the years. In their quantitative and descriptive reports, they show that the field of CSR reporting has been evolving over time. The most recent report looked at 16 sectors in 34 countries, covering more than 3400 companies’ reporting methods for CSR. Important trends that can be seen include the fact that CSR is being integrated into companies’ overall business strategy to add value to customers, that more companies are reporting on CSR, third party auditing is becoming more prevalent and a more clear focus on getting the numbers right is occurring. In a survey conducted within the 3400 companies, the largest reason these trends are happening include increasing the reputation of the company, ethical considerations, motivating employees and promoting innovation and learning. This is a large change from when the survey was conducted in 2008, as then the two most important considerations were economical and ethical.

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It has been suggested that the current level of transparency in terms of CSR reporting means that companies are becoming increasingly accountable for their actions with respect to their environmental impact (Clarkson, Overell, & Chapple, 2011). There are nonetheless still barriers that need to be overcome before the paradigm shift is complete, as it has been suggested that companies are ‘strategically ambiguous’ with CSR reporting (Siebecker, 2009). This means that they want to confuse stakeholders by only releasing partial disjointed information in order to hide an aspect of their operations or emissions that could have a negative impact on their bottom line. Environmental accounting is a field that has been growing within CSR for a number of years that could provide the solution to ‘strategic ambiguity’. A specific subset of environmental accounting is the use of energy and materials (Bartolomeo, Bennett, Bourma, Heydkamp, James, & Wolters, 2000). There has been criticism of this practice in the past though, as it has been argued that there is a deficiency in terms of a standardized taxonomy (Cullen & Whelan, 2006). This is why the standardization of CSR reporting has been gaining ground, especially the work being done by the Global Reporting Initiative (GRI) as it provides companies with the framework to standardize their sustainability reports according to specific guidelines, which are discussed at length below (GRI, 2011).

Standardization and voluntary disclosures can be seen as one form of attaining transparency, however government can also mandate it. A historic example of a decentralized regulatory instrument that has been implemented in the past is for government to provide a mandate for companies to disclose their environmental discharges. In 1986 the United States Environmental Protection Agency implemented the Emergency Planning and Community Right to Know act and by 1989, 20,000 facilities had to report on the emissions of over 300 chemical substances to the Toxic Release Inventory (TRI) (Hamilton, 1995). This information was used for various reasons, such as academics characterizing waste generation, activism by Non-Governmental Organizations (NGO), and federal regulators seeking to minimize impact on the environment & society. It also provided the media with the means to cover stories about companies who polluted heavily. In a study that measured the effect of the media, it was found that there was a positive correlation between how much companies polluted and what how much bad press they subsequently received (Hamilton, 1995). This in turn had an effect on the stock market in that polluting companies had a statistically significant decrease in stock price after the publication of TRI, possibly due to the negative media attention.

(Hamilton, 1995). Other studies came to the same conclusion about the stock price, and found a further significant negative correlation with future toxic emissions by those companies, a positive relationship with wastes being taken away from the facilities, however the overall amount of toxic waste did not decrease by much (Khanna, Quimio, & Bojilova, 1998).

In the case that a government mandate does not exist, then as long as the data provided by companies is verifiable i.e. external assurance is provided though a third part audit, the end result is that reliable information is in the public sphere. Furthermore, if the reporting channel and indicators are standardized, this allowsfor the same decentralized regulatory mechanisms to operate as with the TRI. For example, if a company reveals that their GHG emissions are much higher than expected, it simultaneously allows the public to apply pressure to them through various means, and for stockholders to determine the risk of buying stocks in that company. The problem with voluntary disclosures however, is that companies may selectively choose what indicators to release to the public and they may chose to not adopt the standard at all. This is why standardization of not only business practices, but also reporting is important.

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Adoption of the standards can also diffuse very quickly once competitors see how the marketplace is transforming, which are discussed at length in the theory chapter of this thesis.

As shown in Brunsson & Jacobsson (2000), standardization is one means of filling the gap in social coordination that hierarchies and markets cannot. Although international and domestic policies can soften the blow of climate change, standards can act as self-regulating complementary alternatives working in parallel. Standards act as a form of regulation, and provide a means to establish global order through homogeneity and similarity across borders (Brunsson & Jacobsson, 2000). Standards can change the role of government intervention (‘new governance’) as they require very little input/resources from the public sector and can apply to administrative and operational industrial processes, as well as the way companies disclose CSR related information. These are in essence instruments of control, however they differ from hierarchical structures in that they rely on individuals to adopt them voluntarily.

Governments and the world’s population rely in a large part on the industrial sector to achieve climate targets through voluntary actions on the part of companies operating across their borders (Couder & Verbruggen, 2005). Therefore, the institutional mechanisms appear to already be in place in order for energy and reporting standards to act in parallel to traditional top-down climate policies.

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3. Method

The methods section is split in two: literature review and empirical study. The literature review section explains how academic journals were found that are relevant to the subject.

The empirical study explains how the dataset was chosen and how scores are developed to measure transparency and performance for carbon intensive companies. The descriptive statistical methods are explained in terms of software chosen and extent of calculations. The methods chosen are explained in detail and the reasons why they were chosen are defended in light of alternatives. The limitations of the methods are also laid out to understand to what extent they are valid and reproducible.

3.1 Literature review

The first step was to conduct an academic literature review in order to contextualize energy transparency and disclosure, while understanding what research has already been done. A difficulty in conducting a literature review for an interdisciplinary topic such as this one is that journals generally represent a specific discipline, while journal catalogues aggregate similar disciplines together (Repko, 2012). For example, the database Science Direct is only for papers relevant to science and may not provide much use for on ethics for example. As this thesis is interdisciplinary, numerous databases needed to be used. Following the advice given by Repko (2012), preliminary research was done using a scholarly database that aggregates all of the other databases, namely Google Scholar. This was done by identifying keywords that would be relevant to the study, such as “corporate energy management”,

“carbon disclosure”, “ISO 50001” and Boolean logic was used. Relevant journal articles were skimmed to assess their relevance. If one was found that was deemed relevant, the article was then searched for on the specific journal database where it is located on e.g. Science Direct.

When the link was clicked a new window appeared in the web-browser showing three more articles that people also tend to click on if they have read the one in question. This proved to be of extreme assistance in finding related papers.

Articles were then compiled by topic in a folder on a hard drive and an excel spreadsheet was created to organize them based on the assessment of importance/relevance. If an article was ranked in the category of extreme importance, it was read through in detail and the most relevant sources in the article were sought in the bibliography and read as well. An aspect of the database search that also proved to be of help was the function labeled “cited by” on the search page under each article. For the articles of extreme relevance, this function was chosen on the various databases and all paper that have been published since that one who have cited it are listed. This revealed the chronological development of key theories and ideas, to understand how they came to be and how they have changed over time, which is a crucial aspect of a full-scale interdisciplinary academic literature review (Repko, 2012). This method allows for a literature study to be done that traces ideas through time, revealing the forefront of research on the topic.

3.2 Empirical study

The empirical study was completed in three steps. First, the unit of analysis was determined and the dataset chosen. The second step was to develop a method that allows for various companies’ energy disclosures to be compared and scored out of 100%. The third step is to

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benchmark the energy performance of the companies in terms of carbon intensity and scored out of 100%.

3.2.1 Selection of data

To begin with, it is important to define the criteria used to determine the unit of analysis. As this thesis is looking at energy management in industry, it calls into question the scale at which the analysis is to be conducted. In the most reducible atomistic form that captures the key concepts, the unit of analysis selected was on the scale of the individual corporation and the sustainability reports/websites by which they communicate externally. The corporations were then aggregated by sector and by continent for the purpose of analysis.

The data being used also needs to undergo a quality assessment. To ensure that the data is valid, only datasets from reliable sources were used. Granted this can be somewhat subjective, however in the case of this thesis the main dataset chosen is from the Carbon Disclosure Project (CDP), which a well-recognized external assurance provider claims is the “gold standard for carbon disclosure methodology and process for corporations” (Bureau Veritas, ND, p. 1). The dataset provides a standardized channel to disclose emissions that stakeholders recognize, which gives it a degree of legitimacy. The CDP is an independent non-profit organization with the goal of transforming the global economic system to create systematic change (CDP, 2012). The CDP petitions the laregest private companies in the world (known as the Fortune 500) to publicly disclose information on their carbon emissions, as well as the risks associated with climate change (CDP, 2012). In the decade they have been operating, the number of signatories has increased significantly, as seen in the figure below.

Using the Fortune 500 as the source for the dataset can be defended on the basis that they are the leaders in terms of profitable business (CNN, 2012), their footprint is so large and the number of stakeholders so numerous, that their actions are felt across the board more than smaller companies. According to Forbes (2012), these companies made $3.177 trillion US in revenue in 2010. At this scale it is often difficult to conceptualize how much this is, so a means of making it more intuitive was developed. Nominal GDP is a measure of all the goods and services produced in a year, within a single country (Gans, King, Stonecash, & Mankiw, 2010). Therefore, it would not make sense to compare the market value of a company to GDP, as the market value is linked to not only current profits, but also future profits (BBC, 2012). To find a good basis for comparison, it makes more sense to use total sales of the companies, and compare this to nominal GDP. This was done by looking at the gross

Figure 4: Growth of CDP signatories and their assets over time (CDP, 2011, p.5)

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domestic product at current prices for each country, as well as their population, from the International Monetary Fund (IMF) World Economic Outline Database (2011), and cross- referencing this with table 1 below. Overall, $3.177 trillion US is comparable to the GDP of Germany, the fourth largest economy in the world where 82 million people live, or to the combined GDP of the 61 poorest countries on Earth, where 2.74 billion people live.

Therefore, it becomes clear why Fortune 500 companies serve as the basis for this research.

As this paper is looking for the link between energy transparency and performance, the first step is to define the leverage points in the system and the agents of change (AtKisson, 2011).

To this extent the CDP list was taken, and the 50 most carbon intensive companies we chosen as the basis for analysis, as they contribute 83% of the total carbon emissions of all respondents (CDP, 2011). This point approximated when the derivative of the graph below was 1, meaning that for each additional company over the first 50 the change with respect to emissions became smaller and smaller until it became asymptotic at about the 200^thcompany.

Of the top 50 companies, the emissions were aggregated by sector, as shown in the graph below:

Figure 5: All CDP (2011) respondents were ranked by decreasing emissions, then graphed in a cumulative distribution function, showing that 83% of all emissions come from the top 50 companies.

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Figure 6: Waterfall bar chart showing the sectoral distribution of emissions for the top 50 respondents of the CDP (2011). Not that the emissions total 83%, which corresponds to the dotted line in fig. 5

Fig. 6 shows the top 5 sectors of the 50 most carbon intense companies of the Fortune 500 account for 76% of the emissions in the CDP database (CDP, 2011). This translates into 5.7%

of all anthropogenic GHG emissions (IEA, 2011, p.9). The 38 companies in these sectors, ranked by decreasing total GHG emissions according to the CDP (2011) and sales, profits, assets and market value in billions of $US (Forbes, 2012) are listed in table 1 below:

Table 1: GHG emissions and market information for the dataset used for analysis

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3.2.2 Measuring transparency

The method chosen to measure energy disclosure was ’Content Analysis Index’ (CAI). This involved developing a set of indicators from an academic literature review and then reading through the sustainability reports and web-based disclosures of companies to see if they mention the indicators in question. All indicators were given an equal weighting and the result is a score out of 100 % on how much they disclose.

Content Analysis is defined as: ”… a research technique for making replicable and valid inferences from texts (or other meaningful matter) to the contexts of their use” (Krippendorff, 2003, p.43). It is a scientific tool to systematically go through information in order to determine trends in phenomenon that cannot normally be inferred by simple observation (Krippendorff, 2003). In fields such as accounting this method provides the means to test an underlying variable that may not be directly measurable (Marston & Shrives, 1991). This also means that the perspective taken does not necessarily have to be the author’s, and it can provide the analyst with answers to their own questions that may go beyond the text itself.

The term was first coined in 1941 even though it is a method that has been employed for centuries (Krippendorff, 2003, p. 3).

CAI is a subset of content analysis, where an item-based approach is used to answer the analysts’ questions. Indicators (or items) are determined and the text is read through to see if they are discussed, similar to using a checklist. This provides the analyst with a score for content that is comparable between texts.

Joanne Wiseman (1982) was the first author to use CAI to measure the environmental disclosures of companies’ reports. According to her, previous studies had used the method to make a descriptive survey on the relationship between social disclosures and market performance. Wiseman developed a set of indicators through an academic literature review and separated them into various categories depending on their theme. She then developed an index to score the companies’ environmental disclosure. Since the publication of her article in 1982, authors have referred to the use of CAI for corporate environmental disclosures as the

’Wiseman Index’ (Bewley & Li, 2000; Clarkson, Li, Richardson, & Vasvari, 2008; Sherman, 2009).

In order to determine what indicators to use for the CAI, a literature review was conducted.

This involved reading through hundreds of articles on energy management and assessing their importance to determine what constitutes a good EnMS and what constitutes good reporting on energy use. It should be noted that conducting a literature review for the selection of indicators is only one means of compiling the index. Other methodologies could involve surveying stakeholders to determine the indicators and then applying weights to them. The Delphi method of asking a panel of experts on the matter could be employed for example (Linstone & Turoff, 1975). These methods lie beyond the scope of this paper as this thesis can be considered as a preliminary study for further understanding the subject in detail. Also, what may be important to manage energy may only be relevant to one specific factory, company or country, so a very large sample would be needed to represent energy management in five sectors across the world. It is also assumed that the ISO 50001 EnMS has already laid the groundwork for what can be considered good energy management practice across sectors, so this will be taken at face value and used as a main source to determine the index.

The Transparency of Industrial Energy Management

Examensarbete i Hållbar Utveckling 89

The Transparency of Industrial Energy Management

The Transparency of Industrial Energy Management

Alexander Robert Campbell

Alexander Robert Campbell

Examensarbete i Hållbar Utveckling 89

The Transparency of Industrial Energy Management

Alexander Robert Campbell

Acknowledgements

The Transparency of Industrial Energy Management

The Transparency of Industrial Energy Management

Abbreviations

Table of Contents

1. Introduction

1.1 Research questions

1.2 Outline

2. Problem background and literature review

2.1 Social coordination and governance

2.2 Climate change policies

2.3 Transparency and reporting

3. Method

3.1 Literature review

3.2 Empirical study