In the next decade, $1 trillion in carbon emission-reduction costs will hit our economy.
In an era in which carbon comes with a price tag– call it the “post-carbon economy” – corporate leaders need to learn the best ways to handle their share of the reduction costs while continuing to compete in their markets.
There will be many winners in the post-carbon economy; the biggest beneficiaries will be companies and individuals that make the expensive-carbon trend their friend. These organizations understand that in a sense, their livelihood depends on understanding environmentally-driven macroeconomic forces and taking advantage of their impact. To paraphrase Rahm Emanuel, President Obama’s chief of staff: “A crisis is a terrible thing to waste.”
When carbon emissions costs are priced by the U.S. government, putting them on par with capital and energy and labor costs, the economics of our businesses and lives are changed forever, and our economy goes post-carbon.
There are four interrelated observations you should consider as you navigate your companies into the next decade:
Your ability to compete in the post-carbon economy will largely hinge on how carbon efficient you are, since directly or indirectly, these new carbon emission costs will likely enter your business – but also affect your competitors here and abroad.
Your best hope to find your way to carbon efficiency is to switch from a traditional allocation-based costing regime to activity-based costing with a focus on carbon—what we call “activity based carbon costing,” or ABCC.
Since you already manage your business by processes, the best way for you to manage to compete on carbon efficiency is by managing each of your seven major business processes most carbon efficiently.
Once carbon is priced, your carbon efficiency will determine your competitiveness, ABCC will be your secret weapon, and a business process orientation will keep you managing to your optimal carbon competitive advantage.
By putting a firm price on a ton of CO2 emissions, the economics of virtually every product and service will change. For example, a back-of-the-envelope calculation shows that at the arbitrary price of $50 per ton of CO2e, the producer cost of a bottle of $6.00 retail-priced liquid detergent jumps by about 12 cents. That may not seem like much to you. But when the producer cost for the bottle is $2.00, that’s a 6 percent hike in production costs — not trivial!
It is a fact that energy expenses in most manufacturing and service industries run about two percent of total costs. With each incremental $10 per ton of CO2e of costs, production costs for manufacturers rise by between 1.0 percent and 2.5 percent for each incremental per-ton charge of $10. In some cases, that effectively doubles the cost of the company’s energy. For service businesses, the total cost increases are less, 0.5 percent to 1.0 percent.
Yet there are some wild exceptions, including cement makers, who suffer a steep 13 percent increase for each $10/ton.
What will this post-carbon world look like? Markets are decarbonized, de-globalized, re-localized, reforested, un-deforested, reregulated, and carbon is sequestered, offset and capped-and-traded. Companies will simply including carbon costs in their accounting systems; it will be a factor in how we use human resources. Education systems are re-invented to meet new demands.
If this sounds a little unsettling to American business, which is looking for ways to recover from the global financial crisis, consider that American entrepreneurs have the ability to lead a renaissance in manufacturing, technology, transportation, food and energy, building both middle-class wealth and a new generation of U.S. millionaires and billionaires.
In this new era, American consumers have the opportunity to lead the world in a rapid transformation from a lifestyle that is carbon-intensive, long distance transportation-dependent, disposable and high-emission to one that is decarbonized, re-localized, durable, reuseable, renewable, and low-emission.
Chatterjee is CEO of Hara, a leading provider of on-demand environmental and energy management solutions, and the author of The Post-Carbon Economy, scheduled to be published by SOFICO Books in August 2009.