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How CEOs can beat their competitors in a carbon-regulated world

How CEOs can beat their competitors in a carbon-regulated world

In the heated debate over how countries can reduce emissions, Thailand is proving itself a regional leader.

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How CEOs can beat their competitors in a carbon-regulated world
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In the heated debate over how countries can reduce emissions, Thailand is proving itself a regional leader. The National Economic and Social Development Board (NESDB) has drafted an ambitious 15-year plan to reduce carbon emissions. This plan seeks to harness the country's abundant wind, water, and biomass resources. Just as climate change discussions are encouraging countries to think creatively about ways to improve their energy consumption, CEOs should be asking themselves how they can use carbon competitiveness to gain an edge over competitors. The right answer can ensure a company's longevity. Answering wrong, or ignoring the question, could lead to a company's extinction over time.

Many CEOs track their companies' carbon competitiveness, but mainly to ensure regulatory compliance, avoid negative publicity, or to appeal to eco-conscious customers. Few CEOs try to beat their rivals by identifying the relative strengths and weaknesses of their carbon footprints.

Across industries, the relative size of a company's carbon footprint will define one of its key competitive advantages. For utilities at the industry level, even a modest regulatory requirement for CO2 emissions will result in annual liabilities well in excess of current profits for all companies. But some power companies will be much better positioned than others due to more efficient operations. For example, IRPC Plc is shifting from fuel oil to a gas-combined-cycle system to upgrade its Rayong power plant. The US$200-million investment is expected to pay off with improved production, lower costs, fewer power disruptions as well as potential gains in carbon trading.

Most companies are vulnerable to carbon exposure in one of two ways: direct carbon emissions released by production assets during operations, or indirect carbon emissions from the products they manufacture. In a carbon-regulated world, utility companies are more at risk because of the carbon emitted directly from generating power; automobile manufacturers, on the other hand, are the most vulnerable to indirect emissions from the vehicles they produce. As demand shifts toward more fuel-efficient vehicles, some companies are better off than others, such as Toyota and Honda because they make the lowest-emission vehicles.

One challenge for most CEOs is that a company's productive assets or product portfolios were developed in less-regulated times. As carbon regulation increases, it has the potential to alter the rules of competition: a company with "cleaner production assets" and lower CO2 exposure than its competitors has a chance to dramatically strengthen its position within an industry. For these companies, CO2 regulations are likely to improve their relative cost position, and in certain deregulated markets, an improved cost position can translate into expanded market share. Take Ratchaburi Electricity Generating Holding (RATCH), Thailand's largest private power producer. In response to the changing industry landscape, Ratchaburi recently announced plans to build the country's largest wind farm in Phetchabun to better meet the growing demand for commercial electricity. Other companies, who rely on coal-fired power plants, are at a relative disadvantage. An increase in the carbon tax can hike the coal-fired companies' operating costs much more than Ratchaburi's operating costs.

The oil industry is especially vulnerable to restrictive carbon emission policies. But when Bain & Company compared the quantity of CO2 emitted by six different oil firms from extraction to refining, we found substantial differences. The most CO2-intensive companies emitted more than twice the amount of CO2 as Exxon Mobil, the industry leader, for every barrel of oil sold. The difference is mostly due to upstream operations. These companies have substantial holdings in unconventional fields that require many pre-refining steps, and that results in a higher CO2 emissions tax per barrel.

For CEOs who are eager to strengthen their company's future, understanding the new balance of carbon competitiveness within their industry is the first step. Adjusting to that reality by repositioning a company with less competitive legacy assets and products can take several years. The changes may seem overwhelming, but a good starting point is taking stock of how the company is vulnerable to the threat of carbon emissions and then identifying alternatives that could help reduce emissions. Building carbon competitiveness into their strategy and shrinking their carbon footprint can be a way for companies to gain on the competition.

Sharad Apte, a Bain & Company partner based in Bangkok, heads the firm's Asian Energy Practice. Jorge Leis leads Bain's North American Oil & Gas practice. Peter Parry is head of Bain's global Oil & Gas practice.

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