Members of the Exchange made a voluntary, but legally binding, commitment to the scheme and must meet yearly targets in reducing greenhouse gas emissions. The scheme works in the following way: A government agency sets a standard of emissions and divided this allowance in terms of carbon credits among all volunteer participants. Cap standards on different types of emissions create scarcity of carbon credits. Thus, as under the European Union Emissions Trading System, members that reduce emissions beyond their targets have surplus carbon credits which they can to sell on the market or bank for liquid assets. Companies that do not meet their targets must reduce their emission levels through development of more energy-efficient or anti-pollution technologies or reduce their polluting activities (Merrill & Jain, 2005). Alternatively, they may purchase carbon credits under Carbon Financial Instruments (CFI) contracts. CFI are commodities traded in the carbon market, and each unit of it represents a hundred tonnes of greenhouse gases in their carbon dioxide equivalents.
Heinz has already taken similar initiatives. Its Kitt Green facility reduced direct carbon dioxide emission by 5% in 2006, and there was a decrease of 366400 kg at the Dundalk facility in Ireland. Heinz has expressed interest in sustainable manufacturing. Involving themselves in a program such as the CCX would be beneficial to Heinz, as it would contribute to Heinz’s sustainability, as well as provide experience in dealing with future regulatory schemes.
The compliance segment of the carbon market is commonly branched off into the EU ETS, the Clean Development Mechanism (CDM), the main carbon offset market, and the Joint Implementation (JI) (Lewis, 2009). In 2007, their market shares (measured in trading volumes,) of the global carbon market were 70%, 29% and 1% respectively. Shares in the EU are significantly higher as the stricter EUETS was implemented on top of the Kyoto Protocol. As EU member states join the EUETS, they agree to comply to its regulations and therefore oblige any operating company within its country to do likewise (Merrill & Jain, 2005).
Opportunities offered by carbon markets have not only attracted manufacturing entities, but also financial institutions, portfolio consultants, servicing agents or intermediary traders in the market, as well as other investing organizations that find it advantageous to exploit the emerging market (Kentouris, 2009). Pure traders can get involved in the market by buying and reselling carbon credits at an optimum time – found through consulting and structuring more complex transactions of allowance price risk for trading clients (Merrill & Jain, 2005). Multinational financial institutions such as the World Bank and the European Bank for Reconstruction and Development have entered what we call the “wider emissions trading market” by funding emission reduction projects under the Kyoto Proctol (Merrill & Jain, 2005). Consequently, surplus carbon credits are generated which can then be traded on carbon markets.
In 2008, the carbon market grew by 75%, reaching a value of $116, and is predicted to expand to 2 trillion dollars by 2020. Heinz U.S. should consider international involvement in a carbon cap and trade program to conform to the remainder of Heinz’s facilities already under carbon cap regulations. Firms’ revenues from the carbon market are increasing rapidly worldwide, generating a 116% increase of total revenues acquired by firms in 2006. The International Energy Agency (IEA) predicted that the world’s energy needs will increase by 60% from 2008 to 2030.
History of Carbon Trade Conflicts
As with every form of government intervention in the market, limitations on the level of companies’ carbon emissions have raised many conflicts between industries and governing bodies.
The environmental restraints placed on a firm’s value chain have been often found to either reduce productivity, or essentially lead to financial losses. With the capping seen today, predominantly on carbon emissions, companies have devised methods of ostensible conformity; simply bypassing the environmentally detrimental segments of the value chain by moving into countries with less stringent ecological regulations. For example, with 25 member States of the European Union enforcing mandatory carbon cap-trade, businesses such as Renco and Unilever unsuccessfully attempted to evade the emissions limitations by outsourcing primary steps in production to countries such as India and China. In 2007, Unilever was fined by the Chinese government for its illegal waste water emissions and high level carbon dioxide emissions. Renco, similarly, currently faces a $1 billion lawsuit by the EPA (Asia News, 2007).
With the world rapidly taking to the “green” movement, social responsibility of companies has become a large factor in determining a consumer’s choice of goods and services. Following in the footsteps of the European Union`s EU ETS, both the United States and Japan have introduced voluntary carbon trade markets (Nelson, 2009). Having understood the financial drawbacks of compliance with these emission caps, carbon credit trade now stands as a notable entry barrier for companies wishing to enter carbon regulated countries. Companies have been seen to either explore the markets with less stringent ecological policies or bypass elements of their value chain, and in few cases suffer the consequences. Hitachi, for example, now owns 30% less plants in the European Union than it did in 2001 (Asia News, 2007).
Though being environmentally friendly is currently the consensus of the global economy, the financial consequences of conforming to carbon reduction schemes are often underestimated. EU based Agrifem LTD, specializing in fertilizers, suffered losses of £1.3 million during the implementation of the EU ETS in 2005 and 2006. Similarly, the Aalborg Portland Group of cement, operating in Denmark, reported €3.6 million in expenses, due to participation in carbon schemes, in its financial report of 2006 (Financial Reports, 2006).
Today, the image of a company hinges on its environmental friendliness and compliance with global carbon standards. However, the compromise for an increased goodwill comes often at heavy prices. But, for most that have turned green, initial financial losses soon turn into increased revenues; and, having analyzed the corporate and operational structure of Heinz, involvement in the carbon market seems to hold much promise for return in the future.
Alternatives
Continue with Current Manufacturing Processes
Heinz’s emissions are caused by the use of fuels and electricity in its manufacturing facilities. Due to the reign of carbon reduction schemes in Europe, Heinz has launched efficient operating programs that use environmentally-friendly technology and alternative resources in reducing carbon emissions (Heinz, 2008). However, this is not the case in Heinz U.S. facilities, even though their home country emitted the highest levels of carbon dioxide per capita in 2008 (Merrill & Jain, 2005).
Heinz U.S. claims to have adopted a proactive stance with a high degree of social responsibility towards the carbon crisis. In 2008, it announced a mission statement – a series of environmental sustainability goals – based around an objective of reducing greenhouse gas emissions by 20% by 2015 (Heinz, 2008). Heinz reassures the public that they are wholeheartedly involved in reducing carbon emissions as they are simultaneously “victims” of carbon emissions – increased levels of greenhouse gases, and thus global warming, will have an unpredictable affect on crop production and supply of Heinz’s products. We can see in its Environmental Responsibility Report that no action has been taken upon these claims. The Report states that, globally, Heinz’s direct and indirect greenhouse gas emissions increased by 17 tonnes of carbon dioxide from 883 in Fiscal 2006 to 900 tonnes in Fiscal 2007 (Heinz, 2008). Heinz U.K.’s carbon emissions are capped, meaning that the increase in Heinz’s carbon emissions is solely due to the U.S. manufacturing facilities, even more significantly than expressed in the figures above.
A static stance is the alternative that Heinz has currently chosen to take. This costless alternative involves minimal risks – product prices do not increase; returns remain steady and predictable; production processes are not altered, so workers needed (and thus staff turnover rates) are unchanged. The “Do Nothing” strategy is in favour of consumers, investors and employees, meaning that Heinz exercises organizational stakeholder responsibility. On the downside, this alternative does not allow Heinz’s sustainability goals to be met, and the corporation may find itself at a loss for experience when a mandatory carbon reduction scheme is implemented in the United States. It is likely that a scheme will come into play in the near future. On June 6, 2008, the majority of the U.S. Senate showed support for mandatory climate action through a cap and trade program as they only fell short three votes to invoke cloture on the debate (Cantor, 2006). Having succeeded, they would have proceeded to voting on a specific scheme to substitute the rejected Kyoto Protocol.
Centralize Manufacturing Facilities
Another alternative would be to centralize manufacturing facilities in a developing country that is already under the Kyoto Protocol. Heinz would be able to enjoy economies of scale and lower labour costs, reducing overall manufacturing costs. Heinz U.K.’s knowledge through its experience in the carbon market would be able to aid Heinz to enter the market as one umbrella corporation, and while under a strict carbon reduction scheme, it will be able to move towards its sustainability goals (Harris, 2007). Maurice Strong, one of the world’s leading environmentalists, states that international carbon revenues are increasing rapidly, generating 2.4 billion dollars in 2005 and 5.2 billion dollars in 2006 (Carbon Monetization, 2009). Additional revenue can therefore be earned by trading in the carbon market, and, paired with increased sales profits, given that the lowered manufacturing costs overrule new exporting costs, would cause a significant increase in dividends for shareholders. Due to decreased costs, Heinz could afford to lower product prices to gain a price advantage over competitors. This alternative is favourable to investors and consumers but not to employees. Heinz would have to layoff thousands of workers in all facilities in both home and host countries to centralize manufacturing. Though reducing carbon emissions would mean that Heinz is exercising social responsibility towards the natural environment, it no longer has as high a degree of responsibility towards organizational stakeholders compared to in the first alternative (Heinz, 2008). Additionally, building new facilities for production for all markets would be an untimely and costly operation. In the process, political risks and government policies may be encountered in the new host country; therefore, Heinz wouldn’t be close to its consumer markets and their manufacturing and sales departments would not be in conjunction with one another. All the stated disadvantages of this alternative would further lead to Heinz’s competitors having a location advantage.
Entering a Voluntary Carbon Reduction Scheme within the United States
A final alternative is to enter Heinz U.S. into a voluntary carbon reduction scheme, the Chicago Climate Exchange (CCX) (Di Peso, 2005). Carbon trading can help finance the redevelopment of Heinz’s facilities in order reduce its carbon emissions Therefore, carbon trading and implementation of carbon reducing technology go hand-in-hand (Carbon Monetization, 2009). The idea behind this alternative is for Heinz to make provisions for the inevitable implementation of a carbon reduction scheme and give Heinz U.S. a competitive advantage in the future.
To carry out this alternative, Heinz would need to leverage its core competencies and utilize its experience in the carbon market to make as much revenue possible from trading its credits (Cantor, 2006). This could be thought of as a home replication strategy where Heinz U.K. is the “home” as the true home country is the U.S. where Heinz’s headquarters is, which reduces the risks involved in entering a new market. Heinz U.K. would also be able to provide Heinz U.S. with knowledge of its machinery since they make similar products. In other words, less research and development of technology would need to be done, and therefore it would be less expensive.
In the short-run, Heinz would need to maintain a competitive advantage over other food production corporations within the United States. It would need to balance out revenue earned through carbon credit trading with the costs of redeveloping its facilities, as to not increase product prices. To raise capital, Heinz could also obtain extra carbon credits to sell on the market or to allow a slower rate of technology implementation for its facilities (Merrill & Jain, 2005). To obtain these credits, Heinz would launch projects in developing countries ,where it is more economical to give technologies that sustainably generate energy (e.g. build a hydroelectric dam) or improve the collection and storage of carbon in the foreign countries’ atmospheres (e.g. carry out reforestation). These projects would earn them Carbon Offset Credits and Carbon Reduction Credits respectively (Harris, 2007). If carbon credits are further needed to finance new technologies, Heinz U.K. and Heinz U.S. should work in synergy in the carbon market. They would complement each other by exercising strategic resource deployment. In other words, if more capital is needed to modify U.S. facilities, Heinz U.K. should give its surplus carbon credits and/or revenue collected by selling them to Heinz U.S. to keep it afloat while its costs are high. This is an example of an intra-corporate transfer. If this alternative is carried out, Heinz could also gain a competitive advantage by advertising their use of anti-pollution technologies, an attribute that an environmentally conscious consumer would tend to.
In the long-run, once costs of the new technology are dealt with, Heinz would start to make a profit. They could do this by selling their surplus carbon credits at a high price on the carbon market when a mandatory carbon reduction scheme is implemented in the U.S., as many corporations will be unprepared and will require extra carbon credits while trying to adapt with alternative carbon emission reduction procedures. The State and Trends of the Carbon Market 2007 by the World Bank shows that the average price of carbon has increased from US$1.73 in January 2006 to about US$3.70 in early 2007. The emerging market is growing and shows signs of continued growth; thus, Heinz could also accumulate carbon credits and treat them as an investment for a later date to make an even greater profit (Merrill & Jain, 2005).
When all U.S. corporations are forced into carbon credit trading and the market has matured, as it has done in the EU and Norway, Heinz could deepen its involvement in the carbon market (Heinz, 2008). To do so, it could practice backward vertical integration. Not only would it gain a steady, quality-controlled supply of resources from subsidiaries, but it would also make profits through their respective industries and access control over its carbon credits. This would allow further resource deployment of carbon credits and, fundamentally, lead to increased profits once again (Cantor, 2006).
This alternative would result in Heinz U.S. having a price advantage over its competitors who would have increased manufacturing costs under a mandatory carbon reduction scheme. Heinz’s highly efficient operating procedures relative to other food production corporations would give it an overall cost leadership in the United States. Increased sales and profits made from carbon credit trading will lead to higher returns for investors. Consumers would also be favoured with low product prices and environmentally-friendly manufactured goods for the ethical consumer. Thus, Heinz would be exercising social responsibility towards organization stakeholders. Furthermore, Heinz’s would achieve its sustainability goals and help improve the atmosphere in developing countries, showing responsibility towards the natural environment and general social welfare.
In taking this very calculated approach, Heinz must be aware of the many factors this alternative rest upon. Risks include difficulties in seeking potential credit buyers, uncertainty of future market prices, and sudden changes in scheme policies. The price of carbon is also based on certain variables, namely: the weather, prices and availability of oil and natural gases, and the demand for electricity and heat (Harris, 2007). This alternative would require Heinz to carry out frequent SWOT analyses to ensure that environmental factors are monitored and political decisions made within the U.S. government still tend towards eventual implementation of a carbon reduction scheme. This would ensure that business decisions made regarding the implementation of carbon reducing technologies would continually be guided towards Heinz’s strategic goals.
Conclusion
Carbon trading around the world is a very important and controversial issue. The United States is the second largest producer of carbon emissions where production facilities by Heinz are located. In an effort to protect its customer-based market share and to protect world carbon emissions, different organizations like the Kyoto Protocol have set forth regulations on the matter. That, however, has been the catalyst of several conflicts initiated by the countries implementing the Kyoto Protocol and by countries who do not accept it, namely the United States. We have therefore, come up with several alternatives that Heinz, a United States based international company, may soon have to choose from in order to maintain its business status and carbon emissions at a lower level for future carbon emission regulations to come.
Among the three alternatives analyzed, it is recommended that Heinz U.S. enters the voluntary CCX carbon reduction scheme within the United States. The advantages this alternative may bring to the organizational stakeholders, the natural environment and general social world welfare as a whole far outweigh the disadvantages. In fact, carbon credit prices are expected to rise when the world gets out of our current recession, and this promising future will be a profitable market for selling excess credits acquired through reduced carbon emissions. Heinz will, however, need to invest and focus their financial assets and this might affect their short-term business financial statements. Furthermore, this will place Heinz Company at a much higher socio-cultural standpoint vis-à-vis global consumers due to their involvement in global carbon reduction. Finally, Heinz will secure a long-term advantage compared to other U.S based companies and will reach production efficiencies in conjunction with carbon emission regulations.
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APPENDIX 1
The table summarizes the United States` carbon dioxide emissions from the energy and industry sectors which Heinz is part of. Data is categorized by fuel type or process and ranges from 1990 to 2007.
APPENDIX 2
The graph shows the amount of carbon dioxide emission (1000 million ton of carbon dioxide) from fuel use and cement prodcution by region of the world. The United States have a large portion of the graph in dark blue.
APPENDIX 3
The simplified carbon trading “value chain” has four basic steps, including brokering.
APPENDIX 4
Trading and development opportunities are created by credits. In general, host parties will generate credit allowances for trade by introducing advanced technologies to improve operation efficiency as well as to reduce emissions. Then, the extra emission allowances can be certified as emission reductions and traded with other annex parties who emit surplus carbon dioxide through their operations.
APPENDIX 5
Joint implementation offers opportunity to trade carbon credits with foreign countries through an emission reduction project. As a result, emission reduction units are transferred to the foreign industries as certified emission reductions. It is a way to globally control and reduce emissions in the long term.
APPENDIX 6
The chart provides information on various existing trading systems world-wide as well as pricing estimations for credit allowances for each of them. Specifications about each of the trading schemes are also included.