Outsourcing as a Driver of Sustainable Change
The advent of the low-carbon economy brings many challenges and associated opportunities. The debate around global warming causing climate change is now over and latest scientific research points to changes in our environment happening far more rapidly than any models previously anticipated. The polar ice cap is now expected to be free of summer ice as early as 2014 and scientists have under-estimated the amount of methane, the king of greenhouse gases, in the thawing permafrost by as much as 60 times. What this means is that we are in a period of massive climate upheaval with food and water security starting to become an increasingly concerning global issue. But what does this mean for us as an outsourcing community, if anything?
The response of governments to climate change around the world (excluding the US) was to adopt the Kyoto Protocol in 1997 which created emission reduction targets for the 6 greenhouse gases (GHG). The protocol also created a process called the Clean Development Mechanism which at its core was designed to encourage investment in cleaner technologies, with associated financial incentives. Although much has been achieved, GHG levels in the atmosphere continue to rise and dramatic steps need to be taken to stabilize them. A CO2 stabilization target of 500 parts per million needs to be achieved somewhere between 2030 and 2050, according to Nicholas Stern of the London School of Economics, if we are at least to alleviate the worst impacts of climate change. The successor to Kyoto will be thrashed out in Copenhagen in December 2009 which will place more stringent targets on governments to achieve reduction targets against 1990 levels.
Recently, however, countries have increasingly been adopting a ‘stick’ approach in the form of carbon taxation. This trend will continue and this is where the opportunity for outsourcing arises. Carbon taxation in the form of taxes on fuel and electricity has been around for some time but this is now migrating to taxation on tons of CO2. It is thought that standards such as PAS 2050 (recently adopted in the UK), which is a mechanism for companies to track carbon footprints, will lead to more rapid adoption of taxation in this space.
So what is the nexus between carbon taxation and the opportunity for outsourcing? To understand this, one needs to understand a bit more about how GHG and CO2 emissions are accounted for within a business. The accounting of emissions is divided into three scopes. A Scope 1 emission is an emission created within the four walls of your business, by you, in the conducting of your business activities. A Scope 2 emission is an emission created as a result of any energy you purchase from a utility. Finally, a Scope 3 emission is an emission created by a third party as a result of a product or service you procure or use in conducting your business, the most common example here is an air flight. For you as the user the emission is a Scope 3 emission, but for the airline it is a Scope 1 emission.
Interestingly, the taxation associated with the various emissions has not been finalised but commonsense dictates that the taxation associated with Scope 3 emissions will be vastly different, and lower, than for Scope 1 and 2 emissions, otherwise it would create a mechanism of double taxation on the same activity. Latest thinking indicates that a Scope 3 tax will be split 50/50 between the service provider and the end user.
If the penny has not dropped yet, this is the opportunity to drive outsourcing initiatives as we move into the low-carbon economy.
I propose that the low-carbon economy represents an opportunity to drive the next wave of outsourcing initiatives. Early adopters and those adapting their services with an environmentally friendly and ‘green’ approach to service delivery will be the winners in this new economy as companies look to free themselves of the burden of carbon. As a CFO, the attraction of an outsourced service is infinitely enhanced if the carbon taxation associated with that business activity is halved.
If one takes the argument one step further, the real opportunity for outsourcers is not only to outsource the service but also to reduce the overall footprint of the service being provided. This will have positive financial ramifications for both the service provider and the customer and provides an ideal benefit-sharing mechanism which is a win-win for both parties.
Outsourcing represents a real opportunity for companies to do this. It remains to be seen whether the industry has the business savvy in the short term to realize this opportunity and position accordingly. The low-carbon economy is upon us and will remain as the new business paradigm for the foreseeable future: business must adapt or die.
About the Author
Tim James is a legal graduate from the University of Witwatersrand, Johannesburg, South Africa. He spent 10 years in IBM South Africa and IBM UK in various roles, including transitioning and running a number of large outsourcing engagements. He is passionate about the environment and the impact that man has upon it. Tim is a founding director of sustainable IT, a software and services reseller geared to assisting clients in the new carbon economy through the adoption of sustainable technologies. sustainableIT, South Africa’s first ‘Green’ IT company, offers leading edge technology solutions and consulting services to companies embarking upon a carbon reduction strategy. This includes technology specifically geared to reducing energy consumption within a company’s IT infrastructure. Its mission is to be a catalyst within the South African business context specifically focusing on how information technology can contribute to CO2 emission reduction.