How CEOs can win in a carbon-regulated world

The recent mandate that all vehicles in 13 Indian cities comply with Euro-IV emission norms impacts all auto companies in the country - and businesses in many other sectors. As countries like the US, China and India step up efforts to reduce greenhouse gas emissions, companies will increasingly have to prepare for a carbon-constrained future.

Some companies might stand on the sidelines and wait for policy to take shape, but most CEOs would be better off getting ahead of legislation. They can see it as an opportunity to better serve their companies by asking, "How can I use carbon competitiveness to gain an edge over competitors?"

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Most CEOs get the big picture on carbon competitiveness. Many attend industry forums and contribute to the development of government policies. Many CEOs also track how green their company is but mainly in terms of compliance with regulations, avoiding negative publicity or branding products and services to appeal to ecoconscious customers. Few CEOs take a close look at their rivals and try to beat them at carbon competitiveness - by identifying the strengths and weaknesses of their carbon footprints.

Across industries, especially in the power, auto, steel and cement sectors, the relative size of a company's carbon footprint will define one of its key competitive advantages. To cut energy costs and emissions, diversified conglomerate ITC plans to shift to wind energy in several of its businesses. In its packaging and printing business, for example, the company invested Rs 90 crore to generate 14 mw of wind energy for its plant at Tiruvottiyur, Chennai.

Increasingly, the battle over carbon competitiveness pits one company against another. Consider utility companies. At the industry level, even a modest regulatory regime for CO2 emissions will result in annual liabilities well in excess of current profits for all companies. But within the industry, some power companies will be much better positioned due to more efficient operations. In India, where power is largely generated using fossil fuel - largely coal but also gas - the more efficient power producers stand to win. They will better absorb the increased costs of reducing their carbon footprint than less-efficient rivals. This is particularly important in countries where passing the increase in power-generation costs to consumers is difficult.

In our experience, most companies are vulnerable to carbon exposure in one of two ways: from direct emissions, that is, carbon emitted by production assets during operations, or from indirect emissions, or carbon emitted by the products they manufacture. In a carbon-regulated world, utility companies are more vulnerable to the amount of carbon they emit directly from generating power; automobile manufacturers, on the other hand, are most vulnerable based on the indirect emissions from the vehicles they produce. As demand shifts towards more fuel-efficient vehicles , some companies are better off than others.

Mahindra & Mahindra is one of those companies. The scooters-to-trucks manufacturer opened a plant at Chakan in Maharashtra to produce vehicles that meet the toughest European emission standards - a factory the company calls future-ready. In addition, the group plans to tap the growing electric vehicle market in India.

Why don't more companies take such initiatives? One challenge for most CEOs is that the problem of managing carbon competitiveness is rooted in the past. Historically, companies acquired productive assets or built product portfolios under an older less-regulated environment. Today, within the same industry, each company has a distinct carbon footprint - usually to manufacture the same product or deliver the same service. In such an environment, carbon regulation does not affect each company within an industry equally; instead, it has the potential to alter the rules of competition.

A firm's competitiveness within an industry is determined by legacy assets and products that are more CO2-intensive than its competitors. Alternatively , a company that has lower CO2 exposure than its competitors has a chance to dramatically strengthen its position within an industry.

Consider oil producers. As a group, they are vulnerable to policies that place constraints on carbon emissions. But when we compared the quantity of CO2 emitted by six different oil firms from extraction to refining, we found substantial differences. The most CO2-intensive of the companies we studied emit more than twice the quantity of CO2 as Exxon Mobil, the industry leader, for every barrel of oil that they bring to market. At a $60-per-tonne CO2 price, the less efficient oil producers would face about an $8 per barrel tax while the industry leaders in terms of carbon efficiency would face only about $3.50 per barrel tax.

Understanding the new balance of carbon competitiveness is the first step. Adjusting to that reality by repositioning a company with less competitive legacy assets and products can take several years. As a group, Mahindra & Mahindra expects each business area - from utility vehicles to technology services - to cut non-renewable energy usage by 5% in 3-4 years. The scale of change may seem overwhelming, but for many companies, a good starting point is to take stock of how the company is consuming energy - and then identify the alternatives that could reduce emissions. Often, these are hiding in plain sight such as ITC's use of wind energy; sometimes, they require more evaluation to uncover.

Recognising that many industries need to reduce their carbon footprint, Infosys Technologies , the country's second-largest software exporter , now plans to offer a solution that gives companies a 360° view of their energy use and will help them bring down power consumption and reduce costs. Infosys built the solution based on its own experience of reducing utility bills by 10% and water bills by 5% annually. For most companies, building carbon competitiveness starts with improving operations internally. Over time, as it becomes part of their strategy to constantly take steps to shrink their carbon footprints, companies will get ahead of the competition.

Sudarshan Sampathkumar leads Bain & Co's industrial goods and services (IG&S) and performance improvement practices in India. Co-authored with Jorge Leis, head of Bain's Americas oil and gas practice and based in Dallas, and Pankaj Saluja, partner in New Delhi and member of the IG&S practice.