Tuesday, November 20, 2012

Three Numbers Everyone Should Know

Justin Bieber was on the August 2012 issue of Rolling Stone magazine.  About a week after the issue came out, the publishers were surprised to see that an article by Bill McKibben had gone viral and had more than 10x the activity as the Bieber story.  McKibben’s article was entitled “Global Warming’s Terrifying New Math” and in it he highlighted three simple numbers that add up to global catastrophe – and that make clear who the real enemy is.

The First Number:  2 degrees Celsius

This is the only number that politicians at the 2009 Copenhagen climate conference could agree upon.  Because neither China nor the United States, which account for 40 percent of global carbon emissions, were willing to commit to any meaningful concessions, in the end, all the world leaders could agree to is that “global temperature increases should be below two degrees Celsius (about 3.6 degrees Fahrenheit).”  The “Copenhagen Accord” as it is called, went on to say, "we agree that deep cuts in global emissions are required... so as to hold the increase in global temperature below two degrees Celsius."

It’s important to note that average global temperatures have risen just under 0.8 degrees Celsius to date, and this rise has caused far more problems than scientist predicted.  (A third of summer sea ice in the Arctic is gone, the oceans are 30 percent more acidic, and since warm air holds more water vapor than cold, the atmosphere over the oceans is now five percent wetter, loading the dice for devastating floods.)

Given those impacts, many scientists now believe that two degrees is far too lenient a target.  NASA scientist James Hansen, the planet’s most prominent climatologist says, "The target that has been talked about in international negotiations for two degrees of warming is actually a prescription for long-term disaster."

At this point, 167 countries, of 87 percent of the world’s carbon emitters have signed on to the Copenhagen Accord endorsing the two-degree target.  At this moment, it is the official position of planet Earth that we can’t raise the temperature more than two degrees Celsius.

The Second Number:  565 Gigatons

Scientists estimate that we can pump approximately 565 more gigatons of CO2 in the air by 2050 and still have a four in five chance to stay below two degrees.  The 565-gigaton number still doesn’t provide 100% certainty which makes it a bit like playing Russian roulette with our climate.

The idea of a global “carbon budget” emerged about a decade ago as scientists wondered how much fossil fuels could be safely burned.  It should be noted that computer models calculate that even if we stopped releasing CO2 today, the temperature would still rise another 0.8 degrees as the CO2 already released continues to heat the atmosphere.   Adding the 0.8 increase we’ve already had to the 0.8 degrees that is coming even if we stopped all emissions today means we are 80 percent on our way to the two-degree target.

Obviously, these numbers aren’t exact but the 565-gigaton figure was derived from one of the world’s most sophisticated climate models and has been confirmed by other models and scientists around the world.  As the models improve and more simulations are done, the 565-gigaton figure continues to stand.

In May, the International Energy Agency (IEA) published its latest figures showing that CO2 emissions rose to 31.6 gigatons, up 3.2 percent from the year before.    This number has gone up every single year except for a slight dip in 2009 at the height of the financial crisis.  While efforts to increase renewable use and improve energy efficiency have been significant, these increases in emissions show that those efforts have had only a marginal impact on global CO2 emissions.  In fact, study after study predicts global CO2 emissions to keep growing around 3 percent a year and at that rate, we will blow through the 565-gigaton figure in just 16 years. 

A child born today won’t even be able to drive by the time we pass the 565-gigaton number if we stay on our present trajectory.  And remember, that 565-gigaton number isn’t the carbon budget for the next sixteen years; it’s the carbon budget for the next thirty-eight.  Given the path we are on, Fatih Birol, the IEA’s chief economist said, “When I look at the data, the trend is perfectly in line with a temperature increase of about six degrees.”  That is nearly 11 degrees Fahrenheit, which many predict would create a planet straight out of a science fiction novel.

The message from scientists to reduce CO2 has been consistent for nearly 30 years now but the results are mostly the same:  scientific warning followed by political inaction.  This is what must change if we are to avoid a total catastrophe while most of us are still alive.

The Third Number:  2,795 Gigatons

This is the number that ought to scare you the most.  It is also a number that highlights the political and scientific dimensions of our dilemma. 

Last summer, a team of financial analysts and environmentalists published a report in an effort to highlight the risk climate change poses to their portfolios.  The 2,795 gigatons is the amount of carbon contained in the proven coal, oil, and gas reserves of the hydrocarbon corporations and the countries (Venezuela, Kuwait, et.al) that act like hydrocarbon companies.  The 2,795 gigatons of carbon is fossil fuel we are currently planning to burn.  And the key point here is that 2,795 gigatons is greater than 565 gigatons.  Five times greater!

We have five times as much fossil fuel as inventory on the books of these entities as climate scientists think is safe to burn over the next 38 years.  We’d have to keep 80% of these reserves in the ground and off the market to avoid the two-degree number.   Now that we know these numbers, short of a massive intervention, our fate seems certain.

It is important to note that for all practical purposes, these reserves are already priced into our economy.  Wall Street values these 2,795 gigatons at nearly $27 trillion.  To keep 80% in the ground would mean a $20 trillion write off, not something they are willingly going to do on their own accord.  As McKibben states in the article, “we can have a healthy fossil-fuel balance sheet, or a relatively healthy planet – but when you add up the numbers, we can’t have both.”

Do the math he says:  2,795 is five times 565.  That’s how the story ends.

What To Do

Individual actions just aren’t enough.  I’ve stopped driving and many of our customers drive very efficient hybrid cars but we have 30 years of data to prove that these actions alone won’t keep us below the 565 gigaton figure.  The reality is that most people like cheap flights to distant lands, flat screen TVs, and the convenience of a single passenger automobile.  And few people are going to give those up if everyone else is still consuming them.

A more efficient method would entail policy changes at the political level though we’ve had limited success on that to date.  The hydrocarbon industry is the richest and they spend billions to protect their suicidal business model.  Here in North America, we are fighting about the Keystone Pipeline which would release as much as 240 gigatons of carbon if we allow the Canadian Tar Sands to get to market.  Thus far, President Obama has not committed to stopping that project and in fact, has allowed construction to begin on parts of it.

Here in the Northwest, the possibility of coal shipments through our communities from the Powder River Basin in Wyoming continues to move forward.  The total basin contains some 67.5 gigatons worth of CO2, or more than 10 percent of the available atmospheric space.  James Hansen has stated “that it will be game over for the climate” if this coals comes to market.

What all of this makes clear is that the planet does have an enemy that is far more committed to action than government or individuals.  That enemy is the fossil-fuel industry and it will be our generation’s task to stop them.  Alone among industries, the fossil fuel industry is the only one allowed to dump its main waste, carbon dioxide, for free.  Nobody else gets that break.  The main reason for this anomaly is that up until the past 30 years, we didn’t know that CO2 was heating the planet and acidifying the oceans.  We now know and the price becomes one of our central issues.

By putting a price on CO2, through a direct tax or othermethod, we could enlist the power of markets in the fight against global warming.  Consumers would get strong signals to use fewer hydrocarbons and other forms of energy would be on an equal footing with oil, coal, and natural gas.  Pricing carbon will put a crimp in their profits and we know they’ll fight this based on pure self-interest.

However, this is the moral issue of our times.  Because this is a moral issue with planetary consequences, we are building a global movement to rival any we’ve ever seen.  Corporations once made lots of money in South Africa under apartheid until a global movement of divestiture and isolation overturned a system that some thought never would change.  Our challenge is to understand the hard cold math and to act accordingly.

Movements rarely have predictable outcomes.  Please join me in spreading these numbers, joining the movement, and taking action.  This is the moral issue of our time and nothing will give us greater joy than wining a fight we must win. 

Thursday, February 9, 2012

Building Blocks of a Sound Business Plan

As a company matures out of the start-up phase and begins to grow and become profitable, it is important that your business plan mature as well.  Here are four important pieces that you should including in a mature business plan.

Retirement Planning

Many business owners tend to put all their money back into their business.  While growing and funding your business is important, neglecting to diversify your retirement funding can be disastrous to your long term plans.  I talk to many business owners who depend on their business as a significant source of retirement income and yet their business current plan fails to address the unique needs and opportunities of owning a business.

Estate Planning

Most people think estate planning is only for the very wealthy though that isn't true.  Business owners have a significant portion of their estate - and the source of their family's income after their death - tied up in a business.

Without proper planning, the untimely death of a business owner can result in a significant tax liability for the family, which can potentially lead to negative cash flow and even insolvency.  A mature business plan will address these issues so that the wealth you've created isn't lost to taxes.

Key Employee Planning

Your "key" employees are one of your most important business assets and critical to the success of your business.  Losing a key employee to death, disability, or even a competitor can lead to a substantial financial loss for your business, potentially impacting your current lifestyle and could even delay your planned retirement.

There are employee benefits you can provide which are designed to motivate, reward, protect, and retain them for the long term.  There are even some benefits you can target specifically and exclusively at key employees, like an Executive Bonus Plan.

Succession Planning

Studies show less than a third of small business owners have a success plan in place and about the same number of businesses actually survive into the next generation.  A succession plan can help you spell out the terms for what happens to your business when your no longer there.  Proper planning ensures that you leave the company on your terms regardless of what happens.  I covered more about this in my blog post Reasons You Need an Exit Strategy.

A comprehensive business plan will address each of these important issues.  I rarely see these addresses in start-up plans though they certainly should be part of your planning process as your company matures and are some of the things we address at TriLibrium working with our business customers.  We know proper business planning can make the difference between just surviving and true success.

Call me if you would like to discuss any of these issues.

Friday, January 27, 2012

Reasons You Need an Exit Strategy

Most business owners concern themselves with growth and expansion, and sometimes, how to make ends meet.    When starting or buying a new business, the last thing on your mind is how to exit.  However, an exit strategy is a key component of a successful business plan and too few owners give this proper consideration.

An exit strategy is nothing more than your plan on how you intend to leave the business.  In the end, you will either sell, close, or die.  Each of these situations offers different opportunities and challenges, but the main point of this blog post is that a business owner needs an exit strategy and here are some reasons to have one.

An Exit Strategy Allows for Retirement

Most business owners have a significant portion of their net worth tied up in their business.  With a proper planning, you can turn this net worth into cash to provide you with a comfortable and worry free retirement.

An Exit Strategy Provides for the Future

Your family and employees depend on your business and without proper planning, your death or disability could be tragic for them.  By planning for this fairly common situation, you can make sure your business continues on in your absence and provides for their future needs.

An Exit Strategy Can Provide Cash to Pursue Other Dreams

Regardless of your age, many business owners dream of starting another business or becoming an angel investor to other businesses.  Selling your business can provide the cash to follow these dreams and a well structured strategy will help you maximize what you take from the business and provide the liquidity to pursue new opportunities.

An Exit Strategy Will Appeal to Investors

Most outside investors want to know how they are going to get repaid.  For many investors, an exit strategy is a must because they want their investment protected.  By building this into your plan, potential investors will understand how you are looking out for their interests.

An Exit Strategy Will Help You Know When to Quit

Another reason to think about your endgame is understanding when is it time to pull the plug.  Without thinking about this, it is easy to continue throwing good money after bad in a business venture that clearly isn't making it or working the way you planned.  By planning for this contingency in advance, you'll have clear mileposts to help you decide how and when to end the business, regardless of its success.

It's important that you plan for your business exit.  I guarantee you'll leave your business someday and proper planning can make the difference between a successful exit and one that's not.