International Business - The Ecological Environment

International Business Environment

Ecological Environment of Business

Prepared for

Prof. Syed Alamgir Jafar

(Course Instructor)

Prepared by

Omaer Ahmad [ZR-09]

Gaus Samdani [RQ-12]

Kawsar Ahmad [ZR-50]

Rafaat Wasik Ahmed [ZR-53]

Nasim Ul Haque [ZR-54]

Rashed Al Ahmad Tarique[ZR-61]

Date Of Submission:

23rd September, 2010

Institute of Business Administration

University of Dhaka

CONTENTS Introduction ............................................................................................................................................ 5

Effects and changes in business due to Climate change ........................................................................ 5

Regulatory exposure ............................................................................................................................ 5

Automobiles: ................................................................................................................................... 5

Transport: ........................................................................................................................................ 5

Utilities: ........................................................................................................................................... 5

Integrated oil and gas ...................................................................................................................... 5

Competitive exposure .......................................................................................................................... 5

Automobiles: ................................................................................................................................... 6

Utilities: ........................................................................................................................................... 6

Integrated oil and gas ...................................................................................................................... 6

Technology: ..................................................................................................................................... 6

New technological and business opportunities..................................................................................... 6

Automobiles .................................................................................................................................... 6

Utilities: ........................................................................................................................................... 6

International Summits on Environment and Their Outcomes ................................................................... 7

Supply and Demand: The Market Mechanism .......................................................................................... 9

How are prices set? (The supply and demand model) ........................................................................... 9

Demand ............................................................................................................................................... 9

Demand schedule and Demand Curve .................................................................................................. 9

Shifts in the Demand Curve ................................................................................................................ 10

Supply ................................................................................................................................................ 10

Shifts in the Supply Curve................................................................................................................... 10

The market and equilibrium pricing ....................................................................................................... 11

Economics Basics: Monopolies, Oligopolies and Perfect Competition .................................................... 11

Externalities .......................................................................................................................................... 12

Tragedy of the Commons ................................................................................................................... 13

Internalization of Externalities ............................................................................................................... 13

Pigovian Taxation ............................................................................................................................... 13

Coase Theorem .................................................................................................................................. 14

Definition: .......................................................................................................................................... 14

Calculation of Negative Externalities ...................................................................................................... 15

Carbon Footprint ............................................................................................................................... 15

Calculation Standard and Procedure .................................................................................................. 15

Organizational Footprints .............................................................................................................. 16

Product Footprints ......................................................................................................................... 16

Carbon Emissions Trading .................................................................................................................. 16

Sustainability and Sustainable Development.......................................................................................... 17

Transformation to a Sustainable business model................................................................................ 18

Greenwashing ....................................................................................................................................... 18

7 Sins of Greenwashing ...................................................................................................................... 19

1. Sin of the Hidden Trade-off ............................................................................................................ 19

2. Sin of No Proof: .............................................................................................................................. 19

3. Sin of Vagueness: ........................................................................................................................... 19

4. Sin of Irrelevance: .......................................................................................................................... 19

5. Sin of Lesser of Two Evils: ............................................................................................................... 19

6. Sin of Fibbing: ................................................................................................................................ 19

7. The Sin of Worshiping False Labels: ................................................................................................ 19

Frameworks for developing a sustainable business ................................................................................ 19

The Natural Step Framework ............................................................................................................. 19

Strategic planning using The Natural Step framework ..................................................................... 20

The Sustainable Value Framework ..................................................................................................... 21

Creating sustainable value .............................................................................................................. 21

Assessing Your Organization’s Sustainable Value Portfolio .............................................................. 23

International Institute for Sustainable Development Model ............................................................... 23

Small business and private company considerations .......................................................................... 25

Clean Development Mechanism ............................................................................................................ 25

Difficulties with the CDM ................................................................................................................... 27

Major Environmental and Related Laws of Bangladesh .......................................................................... 28

The Code of Criminal Procedure, 1989 ............................................................................................... 28

The Smoke Nuisance Act, 1905 .......................................................................................................... 28

Environmental Conservation Act (ECA) 1995 ...................................................................................... 28

Environment Conservation Rules (ECR) 1997 ...................................................................................... 28

International laws .............................................................................................................................. 28

Organizing principles .......................................................................................................................... 29

INTERNATIONAL TREATIES A short list of international treaties pertaining to the environment is

described below: ............................................................................................................................ 29

Incentives for companies turning green ................................................................................................. 29

Cost savings ....................................................................................................................................... 29

Enforcement ...................................................................................................................................... 29

Competitive advantage ...................................................................................................................... 30

Companies unwilling to Voluntary GHG reduction: ............................................................................. 30

List of Sources ....................................................................................................................................... 31

INTRODUCTION

EFFECTS AND CHANGES IN BUSINESS DUE TO CLIMATE CHANGE Regions, sectors, and firms, may be impacted through various domains of influence:

• Regulatory exposure from national and international policies and regulation designed to reduce greenhouse gases emissions; • Competitive exposure from a rise in the costs of energy-intensive processes, and a decline in demand for energy-intensive products; • New technological and business opportunities resulting from increased demand for low-carbon, high efficiency goods and services.

REGULATORY EXPOSURE

While many within the business community dislike the Kyoto Protocol, viewing it as a suboptimal mechanism for bringing about a business solution to this problem, policy-makers have created what businesses dislike even more – uncertainty. Companies need a clear picture of future market environments in order to make strategic decisions.

AUTOMOBILES: Car makers are subject to various external regulations, especially in Europe, including: the implementation scheme of the European directive on the trading of greenhouse gas emissions quotas; labeling regulations pursuant to the CO2 directive; tax policies; and green purchasing by public authorities and large corporations. In March 2006, China enacted a 20% tax on large cars in an effort to decrease the demand for those polluting vehicles.

TRANSPORT: Airlines would be brought in under an October 2005 European Commission proposal to cap CO2emissions for all aircraft departing from EU airports. This provides for airlines to trade their potential surplus credits on the European Emissions Trading Scheme (EU ETS).. Emissions from flights within the EU would be included from 2011 and emissions from all flights to and from EU airports from 2012. Assuming airlines fully pass on any extra costs to customers, by 2020 the price of a return flight within the EU could rise between €1.8 and €9. The price of long-haul trips could increase more depending on the journey length as a result of higher environmental impact.

UTILITIES: Greenhouse gas regulation presents an immediate financial charge on utilities, as companies are obliged to reduce output, switch fuel sources, invest in new technologies, or purchase carbon credits to reduce their exposure. In Europe, energy activities are covered by the EU ETS, pursuant to which power stations are required to have a permit for each tone of CO2 emitted. In China, while the current regulations focus more on the reduction of SO2 emissions, it is likely that regulations on CO2 emissions will follow.

INTEGRATED OIL AND GAS: Because of uncertainties surrounding the future of greenhouse gas legislation and regulation, particularly taxation, industry leaders are allocating more resources to Clean Development Mechanism (CDM) projects, which are the most viable mechanism for complying with current and likely future regulation. Repsol YPF has invested over $14m in CDM projects that involve energy efficiency, renewable energy, and fuel switching in developing countries.

COMPETITIVE EXPOSURE

As regulation imposes an additional cost on carbon-intensive products, consumers can be expected to shift demand towards less energy- and carbon-intensive products, bringing both commercial challenges

and commercial opportunities. These two competitive exposure sides stand to affect particularly the automobile, utilities, integrated oil and gas, mining, and technology sectors.

AUTOMOBILES: More stringent fuel economy standards are likely to divert consumer demand towards smaller and more fuel efficient cars. Because Original Equipment Manufacturers’ (OEM) product mixes differ with respect to carbon intensity standards, average OEM costs per vehicle to meet new carbon constraints could differ by a factor of 25.

UTILITIES: Prices of the fuels used to generate electricity are particularly important to this industry. If the price of electricity is increased by emission regulations, this will be largely passed on to consumers because the industry typically operates with small profit margins. Because coal is more greenhouse gas-intensive than other fuels, the price of electricity generated from coal may increase particularly. Consumers may then switch to cleaner generators.

INTEGRATED OIL AND GAS: Increases in costs resulting from higher energy prices, especially downstream and in chemicals, may put downward pressure on the sector’s profits. Because natural gas emits relatively little CO2 when it is burned, demand for this energy source is projected to increase under more stringent greenhouse gas regulations. Should the price become prohibitively high for consumers, it will accelerate demand for newer technologies.

TECHNOLOGY: Consumer awareness is likely to lead to a positive effect on some technology sectors. Particular opportunities may well be created for the telecommunications sector, which has the potential, through improvements in communication over distance and time, to enable interlocutors to meet face to face without their having to use cars or other modes of transport. A similar argument applies to the software sector, to the extent that information technology provides connectivity without the need for physical travel.

NEW TECHNOLOGICAL AND BUSINESS OPPORTUNITIES Climate change does not only impose costs on producers, however. It also presents considerable opportunities. Recent and rapid technological innovation is stimulating growth in new and existing industries, as markets receive somewhat clearer signals about, and draw inferences concerning, the long-term growth potential of ‘low-carbon’ products and services. In some cases, technological innovations may not only reduce emissions of carbon, but lead to firms becoming more efficient in the use of all inputs, boosting net profit.

AUTOMOBILES: The main domains in which innovation is likely to be needed include: the cutting of emissions of pollutants and CO2; reduction of fuel consumption; and development of the use of renewable energies. To meet these objectives, hybrid technologies continue to develop, boosted by increasing fuel efficiency standards in major markets, and rising consumer demand. Alternative fuels are gaining increasing attention (e.g. bio fuels). Original Equipment Manufacturers (OEMs) will likely bring a variety of fuel-saving vehicle technologies to market, including: hybrid power-trains; cylinder deactivation technology; advanced diesel technology; and an array of emerging technologies.

UTILITIES: In response to growing consumer demand, and in order to be able to reduce carbon emissions significantly the development of nuclear power generation and an extended use of renewable energy (solar, wind, and hydroelectricity) are all likely steps in reducing CO2 emissions. In the United States, as elsewhere, utilities are developing diverse portfolios of generating activities. American Electric Power generates over 300MW through wind power. China’s 7th richest person, Shi Zhengrong, has already built a $1.4bn fortune on solar-photovoltaic-panel technology.

TECHNOLOGY: Climate change not only brings technological opportunities, it also enables new businesses to appear and develop. Carbon emission offsetting has indeed become a business in its own right. For example, the Carbon Neutral Company was established to help other company’s measure, reduce, and

Down to Business on Climate Change An Overview of Corporate Strategies by Seth Dunn

offset their carbon emissions. It has what it calls a ‘warehouse’ of technology and forestry carbon offset projects into which would-be off setters can buy and thereby obtain CO2 absolution.

INTERNATIONAL SUMMITS ON ENVIRONMENT AND THEIR OUTCOMES In the early 1980s, scientists were beginning to raise concerns about climate change.In 1988, the

Intergovernmental Panel on Climate Change (IPCC) was created by the United Nations Environment

Programme (UNEP) and the World Meteorological Organization (WMO) to assess the scientific knowledge

on global warming. Its first major report in 1990 showed that there was broad international consensus

that climate change was human-induced.

That report led way to an international convention for climate change. This became the United Nations

Framework Convention on Climate Change (UNFCCC), signed by over 150 countries at the Rio Earth

Summit in 1992. (By the middle of 2000, over 180 countries had signed and ratified it).

The Convention took effect in 1994. By 1995 negotiations had started on a protocol — an international

agreement linked to the existing treaty, but standing on its own. This led to the Kyoto Protocol, adopted

unanimously in 1997. The main purposes of this protocol was to

Provide mandatory targets on greenhouse-gas emissions for the world's leading economies all of whom

accepted it at the time

Provide flexibility in how countries meet their targets

Further recognize that commitments under the Protocol would vary from country to country

Recognizing rich countries have more obligations to emission reduction

As a general principle, it was also recognized that most of the greenhouse gas emissions contributing to

climate change come from the industrialized “Northern” countries, that have been developing since the

Industrial Revolution, as such emissions remain in the atmosphere a long time. In addition, they have been

developing for longer than the Third World, so action to address this must proportionally be with those

industrialized nations.

This difference was recognized as a principle of common but differentiated responsibilities. When the

United Nations Framework Convention on Climate Change was formulated and then signed and ratified in

1992 by most of the world's countries (including the United States and other nations who would later back

out of the subsequent Kyoto protocol), this principle was acknowledged. In simple words this principle

indicates that

Today’s rich nations are the ones responsible for global warming as greenhouse gases tend to remain in

the atmosphere for many decades, and rich countries have been industrializing and emitting climate

changing pollution for many more centuries than the poor countries

It is therefore unfair to expect the third world to make emissions reductions (and also unfair considering

their development and consumption is for basics and for developing, while for the rich, it has moved on to

luxury consumption and life styles)

Climate Change Strategy: The Business Logic behind Voluntary Greenhouse Gas Reductions by Andrew J. Hoffman

The Business of Climate Change Challenges and Opportunities by John Llewellyn

Down to Business on Climate Change An Overview of Corporate Strategies by Seth Dunn

Furthermore, developing countries too were to reduce emissions ultimately, but in a different way. The

rich were to help provide means for the developing world to transition to cleaner technologies while

moving along the path of development.

The Convention provides a framework to tackle a number of issues and had some objectives set,

including the following:

Recognize that a problem exists.

As a result, the ultimate objective is to achieve stabilization of greenhouse gas concentrations in

the atmosphere at a level that would prevent dangerous anthropogenic interference with the

climate system.

Continued scientific research is encouraged because the climate is a very complex issue and

patterns are likely to continue changing.

The Convention recognizes that the current developed and industrialized nations have the

largest current and historic emissions and that they should therefore take the lead and burden

of helping reduce harmful effects and cut down emissions. This is significant, as it recognizes the

right for developing countries to develop economically.

The Convention also recognized that it is likely that the poorer nations will suffer the most, as

there are less resources and capabilities to adapt to sudden changes of this magnitude.

It is also recognized that a more sustainable economy is needed as current consumptive

patterns could be destructive.

The following table includes the more important COPs and the achievements of these conferences:

Event Date and place Principal achievements

Intergovernmental Panel on

Climate Change (IPCC) -

First report

1990 Broad international scientific consensus that human actions are

influencing the climate

UN Framework Convention

on Climate Change

1992, Rio de Janeiro,

Brazil. (Entered into

force 1994)

Committed the global community to stabilizing the level of

greenhouse gases in the atmosphere

Recognized the primary responsibility of industrialized countries,

and the differentiated responsibilities of developing countries

IPCC - Second report 1995 Confirmed human influence on climate

Stated that risk from climate change is severe enough to justify

preventive actions (Governments which have signed the Convention have to accept the findings of the IPCC).

Conference of Parties (COP)

1

1995, Berlin,

Germany

Established budget, secretariat and institutional mechanisms

Established pilot phase of "Activities Implemented Jointly" to

reduce greenhouse gas emissions

Agreed timetable for setting specific reduction targets for

industrialized countries


3

1997, Kyoto, Japan Agreed the Kyoto Protocol which Outlined the greenhouse gas

emissions reduction obligation for Annex I countries


6

2000, The Hague,

The Netherlands

Negotiations over major political issues were held

Consequences for failure to meet emission reduction targets were

discussed

Most of the EU countries rejected the compromise position proposed

Event Date and place Principal achievements

by the US and some other EU countries


6 (Continued)

2001, Bonn,

Germany

Agreements were made on

Flexible mechanisms

Carbon sinks

Compliance

Financing


9

2003, Milan, Italy The parties agreed to use the Adaptation Fund established at COP7

for:

Supporting developing countries better adapt to climate

change

Capacity-building through technology transfer

COP 13/MOP 3 2007, Bali,

Indonesia

Agreement on a timeline and structured negotiation on the post-2012

framework was achieved with the adoption of the Bali Action Plan

COP 15/MOP 5 2009, Copenhagen, Denmark

Unsuccessfully tried to establish an ambitious global climate agreement for the period from 2012 when the first commitment

period under the Kyoto Protocol expires.

SUPPLY AND DEMAND: THE MARKET MECHANISM To clearly understand the importance of externalities and internalization of externalities, it is important to have a clear understanding of the Supply-Demand model. Following passages provide a short discussion on how the mechanism works.

HOW ARE PRICES SET? (THE SUPPLY AND DEMAND MODEL) There are two independent factors that determine price in competitive markets: demand and supply.

DEMAND In economics, demand is the desire to own anything and the ability to pay for it and willingness to pay. The

term demand signifies the ability or the willingness to buy a particular commodity at a given point of time.

DEMAND SCHEDULE AND DEMAND CURVE A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price. A market demand schedule for a product indicates that there is an inverse relationship between price and quantity demanded. The graphical

representation of a demand schedule is called a demand curve. By convention, the demand curve displays quantity demanded as the independent variable (the x axis) and price as the dependent variable (the y axis). The law of demand states that quantity demanded moves in the opposite direction of price (all other things held constant), and this effect is observed in the downward slope of the demand curve. For basic analysis, the demand curve often is approximated as a straight line. A demand function can be written to describe the demand curve. Demand functions for a straight-line demand curve take the following form:

http://www.globalissues.org/article/521/un-framework-convention-on-climate-change

http://unfccc.int/essential_background/convention/background/items/1349.php

http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change

http://en.wikipedia.org/wiki/Demand_curve




Quantity = a - (b x Price),where a and b are constants that must be determined for each particular demand curve. When price changes, the result is a change in quantity demanded as one moves along the demand curve.

SHIFTS IN THE DEMAND CURVE When there is a change in an influencing factor other than price, there may be a shift in the demand curve to the left or to the right, as the quantity demanded increases or decreases at a given price. For example, if there is a positive news report about the product, the quantity demanded at each price may increase, as demonstrated by the demand curve shifting to the right.

SUPPLY

Supply is the amount of some product producers is willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell. A supply schedule is a table which shows how much one or more firms will be willing to supply at particular prices. The supply schedule shows the quantity of goods that a supplier would be willing and able to sell at specific prices under the existing circumstances. Some of the more important factors affecting supply are the goods own price, the price of related goods, production costs, technology and expectations of sellers.

As with the demand curve, the convention of the supply curve is to display quantity supplied on the x-axis as the independent variable and price on the y-axis as the dependent variable. The law of supply states that the higher the price, the larger the quantity supplied, all other things constant. The law of supply is demonstrated by the upward slope of the supply curve. As with the demand curve, the supply curve often is approximated as a straight line to simplify analysis. A straight-line supply function would have the following structure: Quantity = a + (b x Price) where a and b are constant for each supply curve. A change in price results in a change in quantity supplied and represents movement along the supply curve.

SHIFTS IN THE SUPPLY CURVE

While changes in price result in movement along the supply curve, changes in other relevant factors cause a shift in supply, that is, a shift of the supply curve to the left or right. Such a shift results in a change in

quantity supplied for a given price level. If the change causes an increase in the quantity supplied at each price, the supply curve would shift to the right.

THE MARKET AND EQUILIBRIUM PRICING The market combines in exchange, both buyers and sellers. For economics it combines the demand and the supply curve to determine price. This price is called an equilibrium price, since it balances the two forces of supply and demand. An equilibrium price is the price at which the quantity demanded is equal to the quantity supplied. The quantity supplied and demanded is also referred to as the equilibrium quantity. Figure 5, shows both demand and supply determining equilibrium price and quantity. In figure 5, “A” is the equilibrium price and “Q” is the corresponding equilibrium quantity. At the price “A” the quantity supplied and a quantity demanded are equal, and at the “Q” quantity, demand and supply are equal. If price were at “B” the quantity that suppliers would like to supply would be larger than consumers would demand at that price, creating a surplus quantity. A surplus would create forces among the many competitive suppliers to cut prices (supplier are all relatively small). Those forces would push the price down to the equilibrium level at “A”. If prices were at “C” the quantity that suppliers would like to supply, would be less than consumers would demand at that price, creating a shortage. Because of the shortage and a competition among consumers, prices would tend to rise. Only at “A” would there be no tendency for the price to change, and “A” is the equilibrium price. This graph represents the objective impersonal operation of the market. No one sets the price, and if the consumers don’t like the price, they have no one to blame, and no recourse (over the price). If suppliers don’t like the price, they in turn have no one to blame and no recourse (over the price). This is seen by many as one of the strength of markets.

ECONOMICS BASICS: MONOPOLIES, OLIGOPOLIES AND PERFECT COMPETITION

Perfect Competition

Monopolistic Competition

Oligopoly Monopoly

Number Of

Competitors

Many Few to many Very few No direct competition

Entry Or Exit Barrier Easy Somewhat Difficult difficult Regulated by government

Similarity Of Goods

And Services Offered

By Competing Firms

same Seemingly different but may be quite

similar

Similar or different

No direct competing product

Individual Firm’s

Control Over Price

None (set by market)

Some some Considerable to Little

http://www.investopedia.com/university/economics/economics6.asp

Examples Farmer Fast Food Restaurant Automotive manufacturer

Power Company

EXTERNALITIES

An externality (or transaction spillover) is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.1 A situation in which the private costs or benefits to the producers or purchasers of a good or service differs from the total social costs or benefits, which include the private as well as third party costs and benefits, entailed in its production and consumption. An externality exists whenever one individual's actions affect the well-being of another individual -- whether for the better or for the worse -- in ways that need not be paid for according to the existing definition of property rights in the society.

Externalities of either the "positive" or the "negative" sort create a problem for the effective functioning of the market to maximize the total utility of the society. The "external" portions of the costs and benefits of producing a good will not be factored into its supply and demand functions because rational profit-maximizing buyers and sellers do not take into account costs and benefits they do not have to bear. Hence a portion of the costs or benefits will not be reflected in determining the market equilibrium prices and quantities of the good involved. Using a typical supply and demand curve this can be shown as: Externalities of either the "positive" or the "negative" sort create a problem for the effective functioning of the market to maximize the total utility of the society. The "external" portions of the costs and benefits of producing a good will not be factored into its supply and demand functions because rational profit-maximizing buyers and sellers do not take into account costs and benefits they do not have to bear. Hence

a portion of the costs or benefits will not be reflected in determining the market equilibrium prices and quantities of the good involved. Using a typical supply and demand curve this can be shown as:

http://en.wikipedia.org/wiki/File:Externality.svg

The price of the good or service producing the externality will tend toward equality with the marginal personal cost to the producer and the marginal personal utility to the purchaser, rather than toward equality with the marginal social cost of production and the marginal social utility of consumption. Thus, normal market incentives for the buyer and seller to maximize their personal utilities will lead to the over- or under-production of the commodity in question from the point of view of society as a whole, not the socially optimal level of production. Goods involving a positive externality will be "underproduced" from the point of view of society as a whole, while goods involving a negative externality will be "overproduced" from the point of view of society as a whole. In our example above, the individual homeowner pays all the cost of sprucing up his home but realizes only part of the benefits created -- so consequently each homeowner will probably not keep his house up as well as he otherwise might if his neighbors could somehow be induced or required to pay him something for their share of the benefits from his labors. A third type of externality is known as positional externality. Positional externalities refer to a special type of externality that depends on the relative rankings of actors in a situation. Because every actor is attempting to "one up" other actors, the consequences are unintended and economically inefficient.

TRAGEDY OF THE COMMONS

This phenomenon was first focused on by Garrett Hardin and first published in the journal Science in 1968 in his article of the same name. In the article he explained the situation using the example of the medieval system of collective grazing. The fields were common property to all the herders. If one herder brings in an extra cow to the field above the field’s carrying capacity, the herder is the sole benefactor. However, the damage that the land suffers is suffered by all herders equally. Hence there is a disproportionate cost and benefit associated. The tragedy of the commons doctrine is particularly applicable to economic activities that involve natural resources. For example, if Japan discarded toxic chemicals in international waters, it would save itself a large private cost at the expense of a much larger global cost. To protect from such catastrophic events, international organizations

INTERNALIZATION OF EXTERNALITIES There are two wide-known approaches to internalization of externalities – 1. Centralized Approach; 2. Decentralized Approach (Free Market Operation). To better understand them, we should first look into the theoretical base of these approaches. In the following two sections we will examine ‘Pigovian Taxation’ and ‘Coase Theorem’, the theoretical bases for both the approaches.

PIGOVIAN TAXATION A Pigovian tax (also sometimes spelled Pigouvian Tax) is a tax levied to correct negative externalities of a market activity. It is considered as one of the ‘traditional’ means of bringing about market efficiency in economic situations where externality problem exits.

The diagram illustrates the working of a Pigovian tax. A tax shifts the marginal private cost curve up by the amount of the tax. Faced with this cost increase, the producers have an incentive to reduce output to the socially optimum level. This is done by reducing the marginal externality to the marginal tax. The total tax revenue (which could be used to mitigate the effect of the

“Externality vs Public Goods”, Hanming Fang, Duke University.

http://www.auburn.edu/~johnspm/gloss/externality

http://econ.duke.edu/~hf14/teaching/econ681b_spring03/ExternalityVersusPublicGood.pdf


negative externality) is equal to the size of the tax times the new output (the shaded area). As illustrated above the, amount of Pivogian tax to be levied has to be equal to the amount of negative externalities exerted. However, since there is no strict method of calculating negative externalities, the very calculation of Pigovian tax remains questionable. Political factors such as lobbying of government by polluters may also tend to reduce the level of the tax levied, which will tend to reduce the mitigating effect of the tax; lobbying of government by special interests who calculate the negative utility of the externality higher than others may also tend to increase the level of the tax levied, which will tend to result in a sub-optimal level of production. In fact this "knowledge problem" regarding externalities was mention in the very essay of Pigou titled "Some Aspects of the Welfare State" (1954), where he writes, "It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of [the gaps between private and public costs] could interfere with individual choice." In other words, the economist's blackboard "model" assumes knowledge we don't possess — it's a model with assumed "givens" which are in fact not given to anyone. Despite of all these shortcomings, Pigovian taxes increase the fairness of how costs of negative externalities are borne. Even if the amount of such a tax is not at the perfect level to achieve optimal efficiency, it transfers cost associated with the negative externality (eg – pollution) from the public to the polluter. It must be noted that all ‘Ecotax’ are based on this principle.

COASE THEOREM

In law and economics, the Coase theorem, attributed to Ronald Coase, describes the economic efficiency of an economic allocation or outcome in the presence of externalities. This theorem, along with his 1937 paper on the nature of the firm (which also emphasizes the role of transaction costs), earned Coase the 1991 Nobel Prize in Economics. The Coase theorem is an important basis for most modern economic analyses of government regulation, especially in the case of externalities. George Stigler summarized the resolution of the externality problem in the absence of transaction costs in a 1966 economics textbook in terms of private and social cost, and for the first time called it a "theorem."

DEFINITION:

The Coase Theorem states that if private parties can bargain without cost over the allocation of resources, then the private market will always solve the problem of externalities on its own regardless of who (i.e., polluter or victims) owns the property rights. The socially efficient quantity is attained regardless of whom the property rights were initially assigned. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining.

Problems:

Wealth Effect Free-Rider Hold-out Cost to Obtain Information Negotiation Costs Default Ownership

Assumptions:

Given distribution of wealth and income

Complete Information

No Transaction Costs

Clear Property Rights

http://en.wikipedia.org/wiki/Efficiency_%28economics%29

http://en.wikipedia.org/wiki/Allocation

http://en.wikipedia.org/wiki/Externalities

http://en.wikipedia.org/wiki/The_Nature_of_the_Firm

http://en.wikipedia.org/wiki/Nobel_Prize_in_Economics

http://en.wikipedia.org/wiki/Regulation

http://en.wikipedia.org/wiki/Externality

http://en.wikipedia.org/wiki/George_Stigler

http://en.wikipedia.org/wiki/Textbook

Since the Coase theorem asserts that under perfect competition private and social costs will be equal, so only the marginal social cost curve is used taking into account the negative externalities. There can be two possible cases of solutions: One where the steel company has the property rights, another where the community has the property rights.

CALCULATION OF NEGATIVE EXTERNALITIES In both the previous theories, particularly in Pigovian tax, a decent (if not perfect) calculation of negative externality proved to be of paramount importance. The drive to address carbon emission from business units, with the impending global warming scenario, have resulted in many schools of thought to come up with scientific and feasible methods to calculate negative externalities. The resultant externalities are often referred as ‘carbon footprint’. So when we say we are looking to calculate the negative externalities of a certain business unit, this would mean we are trying to measure the carbon footprint of that particular entity.

CARBON FOOTPRINT

A carbon footprint is a representation of the effect human activities have on the climate in terms of the total amount of greenhouse gases produced (measured in units of carbon dioxide). Different types of carbon footprint: 1. Individual footprints

2. Organizational footprints

3. Event footprints

4. Product footprints

The scope of the presentation limits the types of carbon foot printing to only the organizational footprints and the product footprints.

CALCULATION STANDARD AND PROCEDURE

When it comes to calculating carbon footprint, there are basically two methods to choose from:

Calculating what an entity can operationally or financially control (organizational footprints), or

Calculating the entire life cycle of the business. The life cycle analysis is usually focused on a particular

product and is sometimes called the product or supply chain carbon footprint.

Metrics for expressing carbon footprints:

Tonnes of CO2 equivalent (CO2e) ; CO2e expresses the amount of greenhouse gas in terms of the

amount of carbon dioxide (CO2) that would have the same global warming potential.(This is discussed in

detail below).

Tonnes of carbon (approximately ¼ of mass of CO2 is carbon).

Guiding principles

The GHG Protocol uses five guiding

principles when developing a

footprint:

1. Completeness

2. Consistency

3. Relevance

4. Accuracy

5. Transparency

The Global Warming Potential (GWP), as defined in the GHG Protocol, is a factor describing the radiative

forcing impact (degree of harm to the atmosphere) of one unit of a given GHG relative to one unit of CO2.

For example, the table below shows some gases and their GWP-

Greenhouse Gas Global Warming Potential

Carbon dioxide (CO2) 1

Methane (CH4) 23

Nitrous oxide (N2O) 296

Sulphur Hexafluoride (SF6) 22,200

Perfluorocarbons (PFCs) 4,800 – 9,200

Hydrofluorocarbons (HFCs) 12 – 12,000

When calculating carbon emissions, these other gases need to be included in the calculations and related to an “equivalent” CO2, hence the “e” after CO2e.

ORGANIZATIONAL FOOTPRINTS

Organizational carbon footprints are done in three distinct steps:

1. Define the boundaries (what you want to assess)

2. Collect the data

3. Calculate emissions and convert GHGs to CO2e

The GHG Protocol divides the types of emission sources into three scopes. Scope 1 sources are direct emissions from the facility, such as: Emergency generators, Gas boilers etc. Scope 2 is the electricity purchased for the facility. Both Scope 1 and Scope 2 must be included in the calculations per the GHG Protocol. Scope 3 covers the indirect emissions from the operations such as: employees commuting to/from work. Scope 3 emissions are optional and are not required to be reported per the GHG Protocol.

PRODUCT FOOTPRINTS

Product assessments - 7 steps:

1. Analyze the materials and supply chain processes. 2. Build a supply chain map for the product 3. Define the assessment boundaries. The manufacturer has two choices- 4. Cradle to Gate. 5. Cradle to Grave. 6. Collect data (same as procedures used in case of organization footprints). 7. Calculate emissions using appropriate factors

CARBON EMISSIONS TRADING

Carbon emissions trading, also known as ‘cap and trade’, is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. In their article about tradable emissions permit systems3, Judson Jaffe, Matthew Ranson and Robert N. Stavins defines emissions trading (cap and trade) as -

A cap-and-trade system constrains the aggregate emissions of regulated sources by creating a limited number of tradable emission allowances, which emission sources must secure and surrender in number equal to their emissions. The mechanism is based on the theoretical architecture developed around Coase theorem, along with the works of other economists namely Crocker, Dales, and Montgomery. The mechanism was first launched as a part of the US Acid Rain Program. Currently for greenhouse gases the largest of such markets is the European Union Emission Trading Scheme. Under this mechanism a central authority (usually a governmental body) sets a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits (or credits) equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits. The transfer of permits is referred to as a trade. In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions. Thus, in theory, those who can reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest cost to society. Although the attributes of this mechanism in theoretical grounds proves to be a very sound solution, there are several criticisms about regarding its practice in realty. Annie Leonard provided a critical view on carbon emissions trading in her 2009 documentary ‘The Story of Cap and Trade’. This documentary emphasized three factors:

1. Unjust financial advantages to major polluters resulting from free permits,

2. An ineffectiveness of the system caused by cheating in connection with carbon offsets and

3. A distraction from the search for other solutions.

SUSTAINABILITY AND SUSTAINABLE

DEVELOPMENT In 1987, the United Nations released the Brundtland Report, which defines sustainable development as 'development which meets the needs of the present without compromising the ability of future generations to meet their own needs. The United Nations 2005 World Summit Outcome Document refers to the "interdependent and mutually reinforcing pillars" of sustainable development as economic development, social development, and environmental protection. The Venn-diagram properly illustrates how these three pillars come together to establish sustainable development.

Interesting Fact:

The latest annual report from the

World Bank on the global carbon

market showed that in 2009 it grew

to $144 billion, up 6% from 2008

despite enduring its most

challenging year to date.4

Calculating Your Carbon

Footprint-3rd Vermont GREENING UP YOUR BOTTOM LINE Conference pdf

http://www.carbonfootprint.com/calculator.aspx


TRANSFORMATION TO A SUSTAINABLE BUSINESS MODEL

Bob Willard, author of 'The Sustainability Advantage', positions business organization on a 5-stage sustainability continuum - starting from Pre-compliance, then going through Compliance, Beyond Compliance, Integrated Strategy and finally Purpose & Passion. The 1st two stages in this transformation process are self-explanatory. The main difference between organizations of these two stages lay on their legal status. Stage 1 organizations' operation are illegal while the latter's is legal. A company voluntarily moves to Stage 3 when it realizes that it can save money with proactive, operational eco-efficiencies. However, sustainability initiatives are still marginalized within specialized departments, rather than being institutionalized in the company’s governance systems. For this reason organizations in this stage are still unsustainable, only less so Stage 4 is qualitatively different from Stage 3, although the transformations are not trivial. Moving from Stage 3 to 4 requires people and organizations to internalize sustainability notions in profound ways. For this shift organizations must go through four intermediate steps -

1. Eco-efficient processes and products: The firm captures energy, water, materials, and waste handling

eco-efficiencies within the company’s current internal operations and processes.

2. Improved supply chain conditions: Acknowledging responsibility for its products’ environmental and

social impacts throughout their life cycles, the company implements sustainable procurement practices. It

works with suppliers to help them reap the same eco-efficiencies and stakeholder engagement that the

company has itself achieved in Step 3.0.

3. New eco-effective processes and products: This is an exciting step. The company re-designs its products

and re-engineers its processes to be radically more productive. It co-creates new green products and

services with diverse stakeholders. Innovation abounds, spurred on by internal and external creative

ideas. The company re-invents itself, providing useful products and services in existing markets and in

new, strategic markets.

4. Sustainable governance: The company imbeds sustainability principles into its financial measurement

and management systems. It aligns its recognition, reward, evaluation, and remuneration systems to

ensure that everyone understands: sustainability considerations are important.

According to the author, there isn't much difference between stage 4and 5. It’s the motivation that differs. Stage 4 companies “do the right things” so that they are successful businesses. Stage 5 companies are successful businesses so that they can continue to “do the right things.” He describes the first three stages as 'Unsustainable' and final two as 'Sustainable'.

GREENWASHING Greenwashing is a false advertisement technique used to convince consumers that products and services are environmentally safe and sound, when really they are not. In November of 2007, the Seven Sins of Greenwashing report was published. The reaction was vocal, global and long-lasting. The report exposed a nerve with consumers wanting to do the right thing but who were increasingly suspicious of misleading claims. Since the first study, consumers, journalists, marketers, policymakers and activists have used the Seven Sins of Greenwashing as a tool for analyzing and understanding environmental claims.

Judson Jaffe, Matthew Ranson and Robert N. Stavins (2009). "Linking Tradable Permit Systems: A Key Element of

Emerging International Climate Policy Architecture". Ecology Law Quarterly 36 (789). World Bank's report on State and Trends of the Carbon Market(2010)

7 SINS OF GREENWASHING

1. SIN OF THE HIDDEN TRADE-OFF: committed by suggesting a product is ‘green’ based on an

unreasonably narrow set of attributes without attention to other important environmental issues. Paper,

for example, is not necessarily environmentally-preferable just because it comes from a sustainably-

harvested forest. Other important environmental issues in the paper-making process, including energy,

greenhouse gas emissions, and water and air pollution, may be equally or more significant.

2. SIN OF NO PROOF: committed by an environmental claim that cannot be substantiated by easily

accessible supporting information or by a reliable third-party certification. Common examples are facial or

toilet tissue products that claim various percentages of post-consumer recycled content without providing

any evidence.

3. SIN OF VAGUENESS: committed by every claim that is so poorly defined or broad that its real meaning

is likely to be misunderstood by the consumer. ‘All-natural’ is an example. Arsenic, uranium, mercury, and

formaldehyde are all naturally occurring, and poisonous. ‘All natural’ isn’t necessarily ‘green’.

4. SIN OF IRRELEVANCE: committed by making an environmental claim that may be truthful but is

unimportant or unhelpful for consumers seeking environmentally preferable products. ‘CFC-free’ is a

common example, since it is a frequent claim despite the fact that CFCs are banned by law.

5. SIN OF LESSER OF TWO EVILS: committed by claims that may be true within the product category,

but that risk distracting the consumer from the greater environmental impacts of the category as a whole.

Organic cigarettes are an example of this category, as are fuel-efficient sport-utility vehicles.

6. SIN OF FIBBING: the least frequent Sin, is committed by making environmental claims that are simply

false. The most common examples were products falsely claiming to be Energy Star certified or registered.

7. THE SIN OF WORSHIPING FALSE LABELS: The Sin of Worshiping False Labels is committed by a

product that, through either words or images, gives the impression of third-party endorsement where no

such endorsement actually exists; fake labels, in other words.

FRAMEWORKS FOR DEVELOPING A SUSTAINABLE BUSINESS The Natural Step Framework

The Natural Step Framework, was developed by The Natural Step from Canada. Internationally the list of

companies using this framework includes IKEA, Nike, Electrolux, and major industrial players like ICI Paints

and Unilever.

The Natural Step, a sustainability framework developed in 1989 by Swedish oncologist, Karl-Henrik Robèrt,

offers four common-sense ‘system conditions’ for sustainability, which are based on four scientific

principles and a program designed to move an organization towards sustainability. While these scientific

principles are not new, the system conditions they form (see Table) are a breakthrough in making complex

scientific principles understandable and defining the minimum conditions necessary for a sustainable

society. The TNS framework helps us envision sustainability from a systems perspective.

The four system conditions The Natural Step (adapted from Robèrt1999 and Robèrt etal. 1996)

The system conditions are obviously a tall order and cannot be met easily in the current economic system. However, they are not meant to be used as prescriptive rules; rather, they are intended as a tool to help a company envision a future towards which to orient its investments. In this way they act as a compass, helping a company avoid decisions that will have negative environmental and business consequences. At the strategic planning level, the TNS framework clarifies what is required of business to move from its current resource intensive processes to processes that support a sustainable relationship with nature. Because ecological pressures will increasingly shape the future economy, companies that understand the sustainability challenge are more likely to thrive.

STRATEGIC PLANNING USING THE NATURAL STEP FRAMEWORK

The TNS framework also offers a method for strategic planning called ‘backcasting’. This method aligns a company’s long-term vision with its current actions and plans. When backcasting, a company takes the following steps:

1. The participants in the planning exercise learn and discuss The Natural Step framework and agree to use

it as a shared mental model.

2. The participants analyze the company’s current situation in light of the funnel and the four system

conditions. The company examines its current operations, products and services to determine where it is

most out of alignment with the principles of sustainability. For example, for system condition one it asks

whether the company is dependent on materials from the Earth’s crust that accumulate in nature. If so, is the

company willing and able to phase out its dependence on this type of activity? This is done for each of the

four system conditions.

3. Next, the company envisions an ideal future in which it operates in accordance with the principles of

sustainability. This includes imagining how the marketplace of the future will view its products and services

and how its core competencies can best be positioned to service that market. This can be a tremendous

source of creativity and innovation.

4. Finally, the company designs an action plan that will move it from its current reality to its long-term

vision. It takes advantage of ‘low-hanging fruit’, making sure that each short-term action serves as a

platform for longer-term goals that are in alignment with the system conditions. This is necessary to avoid

‘dead ends’, or solutions that work in the short term, but pose problems in the long term.

THE SUSTAINABLE VALUE FRAMEWORK

CREATING SUSTAINABLE VALUE

This framework was devised by Stuart L. Hart and Mark B. Milstein. [Hart, S. and Milstein, M. 2003. “Creating sustainable value” Academy of Management Executive;

http://e4sw.org/papers/Hart_Milstein.pdf]

Just as the creation of shareholder value requires performance on multiple dimensions, the global

challenges associated with sustainable development are also multifaceted, involving economic, social, and

environmental concerns. Indeed, these challenges have implications for virtually every aspect of a firm’s

strategy and business model. Yet, most managers frame sustainable development not as a

multidimensional opportunity, but rather as a one dimensional nuisance, involving regulations, added

cost, and liability. This approach leaves firms ill-equipped to deal with the issue in a strategic manner.

Accordingly, we develop a sustainable-value framework that links the challenges of global sustainability to

the creation of shareholder value by the firm. Specifically, we show how the global challenges associated

with sustainable development, viewed through the appropriate set of business lenses, can help to identify

strategies and practices that contribute to a more sustainable world while simultaneously driving share

holder value; this is defined as the creation of sustainable value by the firm

Greening your Business: A Guide to Getting Started, sponsored by the Royal Bank of Canada

9 steps to greening your business by Kevin Slovick, a simple guide to setting up a green business

Sustainable Business Models: Time for Innovation By Diane Osgood, Ph.D., Vice President, CSR Strategy, BSR

http://e4sw.org/papers/Hart_Milstein.pdf

http://www.rbcroyalbank.com/bobwillard

http://www.funphotoguys.com/BecomingAGreenBusiness.pdf

http://www.google.com/url?sa=t&source=web&cd=1&ved=0CBYQFjAA&url=http%3A%2F%2Fwww.bsr.org%2Freports%2FBSR_Insight_Sustainable_Business_Models_11_03_09.pdf&ei=T-aZTIbtKcX6lwfip71A&usg=AFQjCNGhknynTck2Fplk0UZ09HRmqamOJQ&sig2=llCE56ceNdsIQ5-X6sigow

For a complete version of The Natural Step Framework, visit http://www.thenaturalstep.org/en/canada/natural-step-

guidebooks-sustainability

http://www.thenaturalstep.org/en/canada/natural-step-guidebooks-sustainability

http://www.thenaturalstep.org/en/canada/natural-step-guidebooks-sustainability

ASSESSING YOUR ORGANIZATION’S SUSTAINABLE VALUE PORTFOLIO

As a first step, assess your company’s (or your business unit’s) capability in each of the four quadrants of the Sustainable Value Framework by answering the questions in the above Exhibit. Next, rate your capability within each quadrant on the following scale: 1-non-existent; 2-emerging; 3-established; or 4-institutionalized. An Unbalanced portfolio spells missed opportunity—and vulnerability. A bottom-heavy portfolio suggests a good position today, but vulnerability tomorrow. A top-heavy portfolio indicates a strong future vision for sustainability without the operational or analytical skills needed to implement it today. A portfolio skewed to the left side of the chart indicates an inward focus that may lead to myopia, thereby ignoring important perspectives from external constituencies. Finally, a portfolio skewed to the right side, although highly open and public, runs the risk of being labeled “greenwash” because underlying plant operations and core technologies still cause significant harm.

INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT MODEL

This model was developed by the International Institute for Sustainable Development in cooperation with

Deloitte & Touche and the World Business Council for Sustainable Development. [] It outlines a seven step

approach towards creating a sustainable business. The steps are:

For further

reading on

developing a

sustainable

business and

examples, refer

to “Capitalism at

Crossroads”

Stuart L. Hart

http://www.iisd.org/business/pdf/business_strategy.pdf


1. Perform a stakeholder analysis

A stakeholder analysis is required in order to identify all the parties that are directly or indirectly affected

by the enterprise’s operations. It sets out the issues, concerns and information needs of the stakeholders

with respect to the organization’s sustainable development activities.

2. Set sustainable development policies and objectives

The next objective is to articulate the basic values that the enterprise expects its employees to follow with

respect to sustainable development, and to set targets for operating performance.

3. Design and execute an implementation plan

It is important to draw up a plan for the management system changes that are needed in order to achieve

sustainable development objectives.

5. Develop a supportive corporate culture

In order to ensure that the organization and its people give their backing to the sustainable development

policies, an appropriate corporate culture is essential.

6. Develop measures and standards of performance

The implementation of sustainable development objectives, and the preparation of meaningful reports on

performance, require appropriate means of measuring performance.

7. Prepare reports

The next step in the process is to develop meaningful reports for internal management and stakeholders,

outlining the enterprise’s sustainable development objectives and comparing performance against them.

8. Enhance internal monitoring processes

On an ongoing basis it will be important to develop mechanisms to help directors and senior managers

ensure that the sustainable development policies are being implemented.

SMALL BUSINESS AND PRIVATE COMPANY CONSIDERATIONS

Applying the proposed framework will be a challenge for all enterprises, but smaller businesses may

encounter additional challenges. Besides sustainability reporting, smaller businesses will have to adapt to

the new corporate climate with less in-house expertise, fewer resources and less formal management

structures than larger corporations. It will be difficult for them to keep abreast of ever-changing regulatory

requirements. Fortunately, small businesses can find much of the expertise they require through industry

associations, chambers of commerce, corporate environmental groups (such as GEMI in the USA), national

and international business-government groups (such as the European Green Table), management

consultants and universities.

CLEAN DEVELOPMENT MECHANISM The Clean Development Mechanism (CDM) is one of the "flexibility" mechanisms defined in the Kyoto

Protocol (IPCC, 2007). The flexibility mechanisms are designed to allow Annex B countries to meet their

emission reduction commitments with reduced impact on their economies. The CDM intends to meet two

objectives:

1. To assist parties not included in Annex I in achieving sustainable development and in contributing to

the ultimate objective of the United Nations Framework Convention on Climate Change (UNFCCC), which

is to prevent dangerous climate change

2. To provide developed countries with flexibility for achieving their emission reduction targets, by

allowing them to take credits from emission reducing projects undertaken in developing countries.

The Kyoto Protocol allows developed countries to reach their targets in different ways through 'Flexibility

Mechanisms'. These include:

Emissions Trading (trading of emission allowances between developed nations)

Joint Implementation (transferring emission allowances between developed nations, linked to specific

emission reduction projects), and

The Clean Development Mechanism (CDM)

The CDM is the only Flexibility Mechanism that involves developing countries. It allows developed nations

to achieve part of their reduction obligations through projects in developing countries that reduce

emissions or 'fix' or sequester CO2 from the atmosphere. The economic basis for including developing

countries in efforts to reduce emissions is that emission cuts are thought to be less expensive in

developing countries than developed countries. For example, in developing countries, environmental

http://www.nikebiz.com/crreport/content/strategy/2-1-4-a-new-model-and-shift-to-

sustainable-business-and-innovation.php?cat=cr-strategy

http://www.nikebiz.com/crreport/content/strategy/2-1-4-a-new-model-and-shift-to-sustainable-business-and-innovation.php?cat=cr-strategy

http://www.nikebiz.com/crreport/content/strategy/2-1-4-a-new-model-and-shift-to-sustainable-business-and-innovation.php?cat=cr-strategy

regulation is generally weaker than it is in developed countries. Thus, it is widely thought that there is

greater potential for developing countries to reduce their emissions than developed countries.

The greenhouse gas benefits of each CDM project will be measured according to internationally agreed

methods and will be quantified in standard units, to be known as 'Certified Emission Reductions' (CERs).

These are expressed in tons of CO2emission avoided. When the Kyoto Protocol becomes fully operational,

it is anticipated that these 'carbon credits' will be bought and sold in a new environmental market; they

are already becoming a commodity.

CDM projects need to seek approval by the CDM Executive Board. A number of rules and conditions will

apply, some to all project types and others specifically to afforestation and reforestation projects. While

several of the detailed procedures to be applied to CDM forestry projects are still to be agreed, the overall

framework is already established for approving projects and accounting for the carbon credits generated:

Only areas that were not forest on 31st December 1989 are likely to meet the CDM definitions of

afforestation or reforestation.

Afforestation is the direct human-induced conversion of land that has not been forested for a period of at

least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural

seed sources.

Reforestation is the direct human-induced conversion of non-forested land to forested land through

planting, seeding or human-induced promotion of natural seed sources, on land that was forested but that

has been converted to non-forested land. For the first commitment period (2008-2012), reforestation

activities will be limited to reforestation occurring on those lands that did not contain forest on 31

December 1989.

Projects must result in real, measurable and long-term emission reductions, as certified by a third party

agency ('operational entities' in the language of the convention). The carbon stocks generated by the

project need to be secure over the long term (a point referred to as 'permanence'), and any future

emissions that might arise from these stocks need to be accounted for.

Emission reductions or sequestration must be additional to any that would occur without the project.

They must result in a net storage of carbon and therefore a net removal of carbon dioxide from the

atmosphere. This is called 'additionality' and is assessed by comparing the carbon stocks and flows of the

project activities with those that would have occurred without the project (its 'baseline'). For example, the

project may be proposing to afforest farmland with native tree species, increasing its stocks of carbon. By

comparing the carbon stored in the 'project' plantations (high carbon) with the carbon that would have

been stored in the 'baseline' abandoned farmland (low carbon) it is possible to calculate the net carbon

benefit. There are still a number of technical discussions regarding the interpretation of the 'additionality'

requirement for specific contexts.

Projects must be in line with sustainable development objectives, as defined by the government

that is hosting them.

Projects must contribute to biodiversity conservation and sustainable use of natural resources.

Only projects starting from the year 2000 onwards will be eligible.

Two percent of the carbon credits awarded to a CDM project will be allocated to a fund to help cover the

costs of adaptation in countries severely affected by climate change (the 'adaptation levy'). This

adaptation fund may provide support for land use activities that are not presently eligible under the CDM,

for example conservation of existing forest resources.

Some of the proceeds from carbon credit sales from all CDM projects will be used to cover administrative

expenses of the CDM (a proportion still to be decided).

Projects need to select a crediting period for activities, either a maximum of seven years that can be

renewed at most two times, or a maximum of ten years with no renewal option.

The funding for CDM projects must not come from a diversion of official development assistance (ODA)

funds.

Each CDM project's management plan must address and account for potential leakage. Leakage is the

unplanned, indirect emission of CO2, resulting from the project activities. For example, if the project

involves the establishment of plantations on agricultural land, then leakage could occur if people who

were farming on this land migrated to clear forest elsewhere.

DIFFICULTIES WITH THE CDM Carbon leakage

In theory, leakage may be reduced by crediting mechanisms. In practice, the amount of leakage partly

depends on the definition of the baseline against which credits are granted. The current CDM approach

already incorporates some leakage. Thus, reductions in leakage due to the CDM may, in fact, be small or

even non-existent.

Additionality, transaction costs and bottlenecks

In order to maintain the environmental effectiveness of the Kyoto Protocol, emission savings from the

CDM must be additional. Without additionality, the CDM amounts to an income transfer to non-Annex I

countries. Additionality is, however, difficult to prove, and is the subject of vigorous debate.

Assessing additionality has created delays (bottlenecks) in approving CDM projects. According to World

Bank (2010), there are significant constraints to the continued growth of the CDM to support mitigation in

developing countries.

Incentives

The CDM rewards emissions reductions, but does not penalize emission increases. It therefore comes

close to being an emissions reduction subsidy. This can create a perverse incentive for firms to raise their

emissions in the short-term, with the aim of getting credits for reducing emissions in the long-term.

Another difficulty is that the CDM might reduce the incentive for non-Annex I countries to cap their

emissions. This is because most developing countries benefit more from a well-functioning crediting

mechanism than from a world emissions trading scheme (ETS), where their emissions are capped. This is

http://en.wikipedia.org/wiki/Clean_Development_Mechanism

http://www.cdmcapacity.org/what_is_CDM/rules_conditions.html



true except in cases where the allocation of emissions rights (i.e., the amount of emissions that each

country is allowed to emit) in the ETS is particularly favorable to developing countries.

MAJOR ENVIRONMENTAL AND RELATED LAWS OF BANGLADESH Earliest legislation dealing with pollution of the environment is the Penal Code of 1860. It contains various

provisions relating to the offences affecting the public health, safety and convenience and offences

affecting human body and life through pollution in the environment.

THE CODE OF CRIMINAL PROCEDURE, 1989

This code contains Provisions against occurrence of public nuisance through environmental hazard.

THE SMOKE NUISANCE ACT, 1905

This law addresses the issue of abatement of nuisances arising from the smoke of furnaces or fire-places in

certain areas in Bangladesh.

ENVIRONMENTAL CONSERVATION ACT (ECA) 1995

The national Environmental legislation known as Environmental Conservation Act, 1995, is currently the

main legislative document relating to Environmental protection in Bangladesh, which repealed the earlier

Environmental Pollution control Ordinance of 1997 and has been promulgated in 1995. The main

objectives of ECA 1995 is conservation and improvement of Environment, and Control and mitigation of

Pollution of Environment.

ENVIRONMENT CONSERVATION RULES (ECR) 1997

The Department of Environment has promulgated the Environment Conservation Rules 1997 under the

ECA 1995 to evaluate, review the Environmental Impact Assessment (EIA) of various projects and

activities, and procedures be established for approval. The Rules contain

A list of industries, indicating their allocation to the Green, Amber -A, Amber-B, and Red categories.

Application format for Environmental clearance

Ambient standards in relation to water pollution, air pollution and noise, as well as permitted

discharge/Emission levels of water and air pollutants and noise by industries.

INTERNATIONAL LAWS

Pollution does not respect political boundaries, making international law an important aspect of

environmental law. A plethora of legally binding international agreements now encompass a wide variety

of issue-areas, from terrestrial, marine and atmospheric pollution through to wildlife and biodiversity

protection.

While the bodies that proposed, argued, agreed upon and ultimately adopted existing international

agreements vary according to each agreement, certain conferences have been particularly important.

http://en.wikipedia.org/wiki/International_law

http://en.wikipedia.org/wiki/List_of_international_environmental_agreements

ORGANIZING PRINCIPLES

International environmental law's development has included the statement and adoption of a number of

important guiding principles. As with all international law, international environmental law implicates

questions of sovereignty, comity and even perhaps the Golden Rule. Other guiding principles include the

polluter pays principle, the precautionary principle, the principle of sustainable development,

environmental procedural rights, common but differentiated responsibilities, intergenerational and

intergenerational equity, the "common concern of humankind", and the common heritage.

INTERNATIONAL TREATIES

A SHORT LIST OF INTERNATIONAL TREATIES PERTAINING TO THE ENVIRONMENT IS DESCRIBED BELOW:

Comprehensive Test Ban Treaty: A proposed treaty to prohibit all testing of nuclear weapons in all

environments: underground, underwater, in the atmosphere and in space. In 1999, the U.S. Senate

refused to ratify the treaty.

The Kyoto Protocol: An international agreement setting binding limits on emissions of greenhouse gases

from industrialized countries. This agreement was adopted in Kyoto Japan in December 1997 and

supplements the United Nations Framework Convention on Climate Change adopted in 1992.

Montreal Protocol: International agreement signed by more than 150 countries to limit the production of

substances harmful to the stratospheric ozone layer, such as CFCs.

Non-Proliferation Treaty: A multilateral treaty signed in 1968 which aims to control the spread of nuclear

weapons; extended indefinitely in May 1995. The treaty has been signed by over 175 nations.

United Nations Framework Convention on Climate Change: An international agreement for dealing with

climate change, adopted at the United Nations Conference on Environment and Development (the "Earth

Summit") in Rio in 1992. AKA Climate Change Convention; Climate Treaty.

INCENTIVES FOR COMPANIES TURNING GREEN Green issues are high on the boardroom agenda because of three factors: Cost savings; government

enforcement and competitive advantage.

COST SAVINGS

Cost incentives are perhaps the biggest catalyst behind the green agenda. As businesses across the globe

have to deal with a turbulent economy and ever nearing carbon reduction directives, cost, as in much of

the outsourcing community, is indeed king. Escalating energy prices are also fueling the green fire.

ENFORCEMENT

The growing legislation surrounding climate change and in turn carbon reduction will affect everybody,

regardless of whether a company is a supplier or end user. The enforcement of carbon reduction

directives will have a direct impact on the outsourcing market, ultimately determining just how important

http://en.wikipedia.org/wiki/Sovereignty

http://en.wikipedia.org/wiki/Comity

http://en.wikipedia.org/wiki/Golden_Rule_%28ethics%29

http://en.wikipedia.org/wiki/Polluter_pays_principle

http://en.wikipedia.org/wiki/Precautionary_principle

http://en.wikipedia.org/wiki/Sustainable_development

http://en.wikipedia.org/wiki/Procedural_law

http://en.wikipedia.org/wiki/Intergenerational_equity

http://en.wikipedia.org/wiki/Convention_on_Biological_Diversity

http://en.wikipedia.org/wiki/Common_heritage_of_mankind

the green agenda is.. As time goes by the number of regulations won’t reduce, organisations will only face

more regulatory compliance. If voluntary targets are not met, then sanctions, penalties and enforcement

will only get tougher.

COMPETITIVE ADVANTAGE

Manufacturers and service providers are looking to the green agenda to give them the competitive

advantage. Developing green initiatives and implementing the strategies, means that businesses can prove

exactly how green they are. Organizations not taking the green agenda seriously will find themselves very

quickly ignored at the procurement stage. Not having green credentials will mean not even considered for

the business.

Green Business Cases (Pioneers of the industry)

Sony Electronics: Innovation in Design

Toyota: The Future of Propulsion

BASF: Beyond Eco-Efficiency

Chevron: The Power of Human Energy

Whirlpool

Alcoa

COMPANIES UNWILLING TO VOLUNTARY GHG REDUCTION:

Through late 2002, the fallback position of most European companies had been to support the Kyoto

Protocol, while in the US most companies had remained silent. This has created rifts within some

companies.

Ford has opposed Kyoto, while its Volvo Car unit has supported it. Coca-Cola belongs to the US Council for

International Business, which has not endorsed the pact.

General Motors distanced itself, stating ‘we would not support any kind of Kyoto-like framework that

would put limitations on developed economies.’

Design for Environment - A Guide to Sustainable Product Development (E-book)

http://www.business.gov/manage/green-business/case-studies/


LIST OF SOURCES

Down to Business on Climate Change: An Overview of Corporate Strategies by Seth Dunn

Climate Change Strategy: The Business Logic behind Voluntary Greenhouse Gas Reductions by

Andrew J. Hoffman

The Business of Climate Change Challenges and Opportunities by John Llewellyn




“Externality vs Public Goods”, Hanming Fang, Duke University.


Calculating Your Carbon Footprint-3rd Vermont GREENING UP YOUR BOTTOM LINE Conference

pdf


Judson Jaffe, Matthew Ranson and Robert N. Stavins (2009). "Linking Tradable Permit Systems:

A Key Element of Emerging International Climate Policy Architecture". Ecology Law Quarterly 36

(789).

World Bank's report on State and Trends of the Carbon Market(2010)

Hart, S. and Milstein, M. 2003. “Creating sustainable value” Academy of Management Executive;

http://e4sw.org/papers/Hart_Milstein.pdf

Greening your Business: A Guide to Getting Started, sponsored by the Royal Bank of Canada

9 steps to greening your business by Kevin Slovick, a simple guide to setting up a green business

Sustainable Business Models: Time for Innovation By Diane Osgood, Ph.D., Vice President, CSR

Strategy, BSR


http://www.nikebiz.com/crreport/content/strategy/2-1-4-a-new-model-and-shift-to-

sustainable-business-and-innovation.php?cat=cr-strategy



Design for Environment - A Guide to Sustainable Product Development (E-book)



International Business - The Ecological Environment

Documents

Transcript of International Business - The Ecological Environment