Even without carbon legislation, software to help companies count emissions is starting to roll out.
In America’s fast-growing and complex world of carbon footprint reporting, the spreadsheet is still king. But sophisticated software solutions are starting to crop up to replace manual data entry, and no one questions that they are the future. While the U.S. Congress continues to debate cap and trade, federal and state regulations and pressure from the investment community mean greenhouse gas (GHG) reporting is increasingly being tied to financial reports.
Companies are hunting for the standout tracking tool that can do the heavy lifting. Observers say the integrity of emissions trading markets will depend on it.
“As emissions reporting evolves and companies are able to increase sophistication for reporting, they are realizing that spreadsheet calculation … is not sufficient and can lead to errors,” says Eric Israel, head of U.S. climate change and sustainability services at accounting firm KPMG.
Writing on the wall
Starting in early 2011, U.S. Environmental Protection Agency (EPA) will require more than 30 industry sectors to collect annual emissions in the first federal mandatory greenhouse gas (GHG) reporting system. The rule covers about 85 percent to 90 percent of U.S. climate pollution.
At the same time, the Western Climate Initiative (WCI), a group of seven western states and three Canadian provinces, plans to mandate carbon accounting for its coming cap-and-trade pact; the scheme is set to go live in early 2012, according to a detailed plan released by the initiative in July. Currently, California; New Mexico; Quebec, Ontario; and British Columbia are completing their regulations, representing 70 percent of the region’s GHG emissions.
The California Air Resources Board (CARB) has been pulling together provisions for a state-only carbon trading market to meet the Global Warming Solutions Act (AB32) which aims to cap emissions at 1990 levels by 2020. The state’s largest polluters began reporting emissions in 2009 because of the law.
These are just the most far-reaching regulatory systems on the books.
The Obama administration may soon force government contractors to track GHG output or lose contracts under a General Services Administration plan. And in a step that could accelerate reporting among businesses, the Securities and Exchange Commission says it is planning to require U.S. corporations to assess and reveal the effects of climate change on their financial health.
Across North America, more than 400 firms are now reporting to The Climate Registry (TCR), a nonprofit collaboration based in California that runs a central repository for reporting GHG emissions. Last year, more than half of U.S. Fortune 500 firms revealed their emissions through the Carbon Disclosure Project (CDP), a London-based global climate change reporting system. In April, Google (Nasdaq: GOOG) added CDP’s carbon disclosure ratings to the “key stats and metrics” section of its Finance search results, adding pressure for improved reporting.
With all this proof that GHG reporting is becoming important to investors, analysts agree that current collection tools do not match the complexity of the task.
“The core of the reporting is a guy and a meter and a spreadsheet,” says Neal Dikeman, a partner at merchant bank Jane Capital Partners and chairman of CarbonFlow, a software firm that verifies carbon offset projects. “We’re struggling just to get the spreadsheets up and posted and accurate. …Very, very little of it is actually being done in software.”
Dikeman, says that’s about to change.
Pacific Gas and Electric Company (NYSE: PCG), California’s largest utility, has been reporting emissions since 2002 to voluntary reporting programs, and to CARB since 2009.
“To date, we’ve done everything through spreadsheets … and everything is essentially in Excel,” says Robert Parkhust, manager of climate protection and analysis at PG&E.
But the complexity of reporting is forcing the firm to quit last decade’s data solutions. PG&E “is starting to evaluate an IT solution,” Parkhurst says. And while the number of companies that are getting into the space “has grown quite substantially in the past year,” none are able to cater to its full emissions management needs, he adds.
So far, more than 50 major software players and startups offer carbon management software, according to a January report by Groom Energy Solutions. The sector saw $46 million in venture capital investment in 2009. By 2011, the market is expected to leap 600 percent and include 800 product providers, according to the study.
“There are not a lot of software solutions that we’ve seen that are focused on the utility industry, either from a California perspective or a U.S. perspective,” Parkhurst says.
Still, PG&E is test driving some potential game changers. “This is a journey for us,” he says.
In June 2010, PG&E announced a partnership with the University of California, Berkeley to pilot software by California-based startup Climate Earth that calculates the environmental footprint of the utility’s supply chain, or its “Scope 3” emissions.
Climate Earth, founded in 2008, is the brain child of Chris Erickson, a former Fortune 500 executive. Its software inputs thousands of line item purchases, measures their environmental impacts and churns out sophisticated reports on carbon, water, toxins and waste.
There is “no data entry, no installation and no staff required for the customer,” Erickson says.
Clients get monthly automated updates while they crunch their financials. It is a “full supply-chain analysis that is integrated with the financial system,” says Erickson, and “no one else is doing this.”
Most of what Climate Earth aims to do is help companies bolster their bottom lines. Erickson says his product might help companies see the carbon intensity of their least profitable products or calculate the risk of a potential oil price spike.
In that way, the software moves carbon accounting out of the corporate social responsibility group and into the executive office (see “CSR takes a walk down Wall Street,” Sustainable Industries, May 2010). “That’s vital if we’re going to build a sustainable economy,” Erickson says.
Monitoring of Scope 3 emissions may be the future of carbon tracking, but direct emissions are its present. PG&E is testing the Climate Registry’s online reporting software for the electric industry, the Climate Registry Information System 3.0 (or CRIS).
Its developer, British software giant Misys, is a major player in tech solutions for banking and healthcare. The firm’s reporting platform keeps tracks of GHG inventories for the registry’s users, converts raw data on fuel use and other sources into carbon dioxide equivalents and produces comprehensive reports.
But it’s not just a calculator, says Graham Sands, the firm’s senior director of global technology. “There’s a whole workflow engine behind it that involves verification bodies and reporting to different agencies.”
“As the area of GHG reporting is rapidly evolving, this tool represents progress in GHG reporting functionality,” Parkhurst says.
For Misys, the key to its solution is that it’s highly flexible and configurable. The software “can evolve as the market matures” and “makes it very, very easy to get data into the registry systems,” says Sands.
The reason for this is that regulations remain wildly in flux.
“It’s really hard to build software until you know what has to be reported,” Dikeman of Jane Partners says. Each regulatory and voluntary scheme has different levels and qualities for what needs to be reported. “Companies are struggling with how to sort that out,” he says.
The collapse of efforts to pass a federal cap-and-trade pact this year adds another complication. That “is the single biggest obstacle … to bringing solutions to market,” Sands says. “When you don’t know the end game it’s hard to build a good software.”
But should Congress ultimately pass sweeping greenhouse gas regulation, Misys will be ready, Sands asserts.
Trillion dollar experiment
While U.S. climate policy is sorted out, the European Union Emissions Trading System (EU-ETS), already 200 times the size of RGGI, is the scene of most of the action.
But Dikeman notes that once there is full rollout of the EPA, CARB and WCI—on top of the next phase of the EU-ETS—carbon regulation will touch just about every major energy and industrial company in the world.
“It will be huge,” he says. “And they’re not going to do that without a lot of software.”
For his part, Dikeman imagines a future emissions reporting regime that will have electronic verification of “everything”—from the “meter all the way through to the documentation in a real-time basis.”
The shift is “happening now, it just takes time,” Dikeman says. The entire reporting system is “a half a trillion dollar experiment” in how to “design rules that will fight climate change at serious scale without causing economic collateral damage that we can’t handle,” he adds. “It’s a pilot – it’s not supposed to be right or perfect.”