Voluntary carbon offsetting A case study of Husqvarna AB from a firm, consumer and

society wide perspective.

Bachelor’s thesis in Economics

Authors: Sofie Svensson, 780307-2409

Maria Rothén, 840412-2502

Tutors: Professor Börje Johansson

PhD Candidate James Dzansi

Jönköping June 2010

Bachelor’s Thesis in Economics

Title: Voluntary Carbon offsetting, A case study of Husqvarna AB

from a firm, consumer and society wide perspective

Author: Sofie Svensson

Maria Rothén

Tutor: Professor. Börje Johansson

PhD Candidate James Dzansi

Date: [2010-06-10]

Subject terms: CO2, Carbon Offsetting, CBA, Climate change

Abstract

Global warming is an international problem which has led to that many corporations

today has an increased environmental awareness.

This thesis includes a Cost Benefit Analysis (CBA) approach which evaluates whether

carbon offsetting is a profitable alternative for corporations and society wide. The study

is predominately focusing on the emissions of the greenhouse gas . The calculations

of CBA show the difference between the scenarios with or without the carbon

offsetting. In the CBA approach effects are divided into benefits and costs.

The study includes a case study of Husqvarna AB and is carried through with aim to get

a decision support whether or not to make the corporation carbon neutral. Basic data

from Husqvarna AB has been used.

Abbreviations

CBA Cost-Benefit Analysis

CDM Clean Development Mechanism

CER Certified Emission Reduction

CO2 Carbon Dioxide

EIA Energy Information Administration

EUA European Union Allowances

ERPA European Emission Reduction Purchasing Agreement

GDP Gross domestic product

IPCC Intergovernmental Panel on Climate Change

JI Joint Implementation

NPV Net Present Value

SAR Second Assessment Report

UNEP United Nation Environmental Program

UNFCCC United Nations Framework Convention on Climate Change

US EPA United States Environmental Protection Agency

VER Verified Emission Reduction/ Voluntary Emission Reduction

WMO World Meteorological Organization

1

Contents

1 Introduction ..............................................................................2

1.1 Background to research ..................................................................... 2

1.2 Research problem .............................................................................. 3

1.3 Purpose ............................................................................................. 3

1.4 Research questions ........................................................................... 3

2 How to evaluate Carbon offsetting .......................................4

2.1 Carbon offsetting ................................................................................ 4

2.1.1 Companies providing carbon offsetting ................................ 5

2.2 Cost benefit analysis (CBA) of carbon offsetting ................................ 5

2.2.1 CBA and practical decision-making ...................................... 6

2.2.2 Critics of CBA ....................................................................... 7

2.2.3 Net present value of CBA ..................................................... 7

Net Present Value formula ........................................................................... 8

2.3 Costs and Benefits ............................................................................. 8

2.3.1 Firm and society wide costs and benefits ............................. 8

2.3.1.1 The marginal damage cost of CO2 .................................... 8

2.4 Price elasticity of demand .................................................................. 9

3 Case study of Husqvarna AB ................................................ 11

3.1 Husqvarna AB .................................................................................. 11

3.2 Strategy ........................................................................................... 11

3.2.1 Data Collection ................................................................... 12

3.3 Calculations ..................................................................................... 12

3.3.1 Corporative costs and benefits ........................................... 12

3.3.2 Society wide costs and benefits ......................................... 13

3.3.3 Net present value ............................................................... 13

3.3.4 Findings of the survey questions for retailers ..................... 14

3.3.5 Elasticity of demand ........................................................... 15

3.4 Case study findings .......................................................................... 17

4 Conclusion ............................................................................. 19

5 References ............................................................................. 21

6 Appendices ............................................................................ 23

6.1 Myclimate ......................................................................................... 23

6.2 CO2focus ......................................................................................... 23

6.3 Utsläppsrätt.se ................................................................................. 24

2

1 Introduction

About 30 thousand billion tons of carbon dioxide ( ) is emitted worldwide every year, the

average world citizen emits 4080kg of annually (Kirby, 2008). The built up human

dependence of carbon based energy creates a constant increase of greenhouse gases in the

atmosphere. There are many potential effects of

emissions such as damages on

ecosystems, coastal zones, public lands, recreational opportunities and natural resources

forests and the polar regions, decrease in agriculture, water and food supply, sea level rise,

adaption to new conditions and extreme events like earthquakes or flooding (US EPA, 2010).

All these effects bring costs to the society and by reducing the amount of these costs can

be reduced. The record of global temperature shows that since the beginning of the last

century, the temperature on earth has increased by about half a degree Celsius and that this

trend has become even stronger during the last decades (Naturvårdsverket, 2006). The cause

of this increased temperature is considered to be greenhouse gases. With 83.8% of total

greenhouse gases, is the most abundant greenhouse gas added to the atmosphere (EIA,

2008).

This thesis will present an environmental alternative for corporations to take responsibility of

their emissions through carbon offsetting.

1.1 Background to research

The Kyoto protocol is the foundation of most research which is performed in the area of

climate change. The first step towards the Kyoto protocol was taken already back in 1992 in

Rio de Janeiro when UN adopted a climate convention. Five years later in 1997 in Kyoto,

Japan several countries decided together to reduce their emissions. The convention was taken

into effect in February 2005. In large the convention means to reduce emissions of

greenhouse gas by 5.2% during the period 2008-2012 compared to the amount released in

1990 (UNFCCC, 2008). The members of the European Union are purposed to reduce their

emissions by 8%, individual strategies for each country have been decided in the EU. How

much each country will reduce their emissions depends on the structure of the country and

how far it has reached with its national environmental work. Further the environmental laws

in individual countries are expected to become stronger in the near future. The Kyoto

protocol can be seen as a first step towards the climate conventions long term goals

(Naturvårdsverket, 2008). The largest country in the world when it comes to greenhouse gas

emissions, The United States has not ratified the protocol.

In 2007, the former vice president of the United States, Al Gore and the UN

Intergovernmental Panel on Climate Change (IPCC) was rewarded with the Nobel peace

prize, “for their efforts to build up and disseminate greater knowledge about man-made

climate change, and to lay the foundations for the measures that are needed to counteract such

change.” (Norska Nobelkommittén, 2007). Al Gore’s book “An inconvenient truth” and the

movie with the same name is to a large extent based on the IPCC’s Fourth Assessment Report

(AR4) which indicates a strong connection between human activities and climate change

(IPCC, 2007a). The concentration of greenhouse gas in the atmosphere is very high compared

to the time before the industrialization and this is seen as the biggest reason for the increased

3

temperature on earth. The report is also pointing out that if nothing is done to reduce

greenhouse gas emissions now, the change in climate will be larger in the future than it has

been during the 20th

century.

The IPCC is the leading body for evaluation of climate change, it is based on UNEP, The

United Nations Environmental Program and on the WMO, World Meteorological

Organization to give the world a scientific view of climate change and its potential

consequences. The IPCC do not perform any research on their own, instead they review the

most recent scientific, technical, and socio-economic information from all over the world.

Thousands of scientists are contributing on a voluntary basis to the work of IPCC.

There are still some researchers who are critical to the statement that climate change is a

consequence of human activity. They accept that there has been a rise in temperature but

claim that it might just as well depend on natural variations in climate (Kaur, 2008). Some

researchers even claim that an increased amount of greenhouse gas in the atmosphere is good

for human beings. This is a very small part of scientists and their claims are hard to find in

scientific articles which also make them hard to evaluate.

Despite many years awareness of climate change, the topic of carbon offsetting is a rather

new issue where limited research has been performed.

1.2 Research problem

With interest in environmental issues and to do something useful, this thesis touches the topic

of carbon offsetting and includes a cost benefit analysis (CBA) to be used as decision support

for companies with interest to reduce their emissions.

The question of climate change as an effect of emissions have received increased

attention with the result that corporations recently have started to think more “green” and to

follow the increased demand of environmentally friendly products. Carbon offsetting or

making products carbon neutral is a way for corporations to reduce their greenhouse gas

emissions. This can be done through several different approaches. Some of the most

important are investing in renewable energy, energy efficiency projects and tree planting

projects.

1.3 Purpose

The purpose of this thesis is to analyze the social and corporate net benefits of carbon

offsetting. The obtained result will be used as a decision support for corporations who

consider offsetting their emissions.

1.4 Research questions

How much will it cost corporations to become carbon neutral?

How much do emissions cost the society?

Who are the gainers and who are the losers of carbon offsetting?

Price elasticity of demand, how much of the offsetting costs can be added on the price

of the products without losing customers?

4

2 How to evaluate Carbon offsetting

2.1 Carbon offsetting

Carbon offsetting implies that companies voluntarily offsets emissions released from their

activities or products. There can be many steps for a corporation to reduce their emissions of

greenhouse gases. As a first step a corporation needs to analyze what kind of emissions that

are released and by which activities. Subsequently, arrangements should be made to reduce

emissions in the best possible way (DECC, 2010).

For corporations who wants to make an additional environmental effort it is possible to offset

the remaining emissions through the purchase of offsetting credits. Credits are sold by

organizations who offer carbon offsetting such as Myclimate, CO2focus or Utsläppsrätt.se.

There are two different approaches for corporations to offset their emissions. The first

alternative is to hire an organization which provides carbon offsetting. These organizations

generally provide a package deal, they calculate the amount of emitted and supply

offsetting credits to compensate for these emissions. Alternatively the corporation itself can

calculate its emissions and buy credits to offset. The number of firms that provides carbon

offsetting deals to corporations has increased during recent years. Parts of the market lack a

control system and several unreliable actors exist. Some of these corporations take

unacceptably large mark-ups on offsetting credits, some even more than 100%. This means

that only a small part of the amount paid for the credits are really used for concrete activities

that reduces greenhouse gas emissions (Swedish Energy Agency, 2009).

Corporations are recommended to buy offsetting credits from the European Emission

Reduction Purchasing Agreement (ERPA), or from projects carried out by one of the two

Kyoto protocol’s project based mechanisms, CDM or JI. CDM-projects are carried out in

developing countries and JI-projects mostly in Eastern Europe. A substantial control is

performed for each project and for the reduction units that emerge. In ERPA, each credit

amounts in a certain share of the European industry’s limited emission space. In this system

each ton of released has to be covered by an EU Allowance. The use of EU Allowances

for carbon offsetting implies that the size of the already limited emission space for industrial

activities in the system is reduced and that a corresponding reduction must be fulfilled

somewhere else in the system (Swedish Energy Agency, 2009).

5

Table 1, Reduction units (Swedish Energy Agency, 2009).

Reduction units in UN and EU systems of rules

CER Certified Emission Reductions from CDM-projects (1 CER = 1 ton CO2-

eqvivalent).

ERU Emission Reduction Units from JI-projects (1 ERU = 1 ton CO2-eqvivalent).

EUA EU Allowances

European Emission Reduction Purchasing Agreement (ERPA), EU-ETS

(1 EUA = 1 ton CO2).

Reduction units from the unregulated market excluded from FN- and EU-

systems of rules:

VER Verified Emission Reductions/Voluntary Emission Reductions

(1 VER = 1 ton CO2-ekvivalent)

2.1.1 Companies providing carbon offsetting

Several companies who offer carbon offsetting deals for corporations exist in the market.

Some of these companies are Myclimate, CO2focus and Utsläppsrätt.se, all with support

from United Nations Environment Program (UNEP). These companies offer voluntary

carbon offsetting and are non-profit organizations. Myclimate and CO2focus works globally

with carbon offsetting projects such as windmill plants in Turkey or solar power plants in

India. The projects follow the strictest UN-standards, Clean Development Mechanism, Gold

Standard (CDM) and the green house gas protocol (GHG protocol) (Myclimate, 2010,

CO2focus, 2009). Utsläppsrätt.se has chosen to work exclusively with EUAs (Utsläppsrätt.se,

2010). emissions can easily be calculated on these companies’ web-pages and converted

into offsetting credits. Further information about these corporations is provided in Appendix

1.

2.2 Cost benefit analysis (CBA) of carbon offsetting

One way to evaluate the net benefits of carbon offsetting for corporations and society wide is

by the performance of a cost-benefit analysis. The information accomplished by this analysis

can be used to compare the alternatives and to decide whether to carry out the project or not.

The theory of CBA is consequently specified in order to report the different aspects of the

analysis performed later on.

CBA is used to evaluate different alternatives for a project, regulation or another intervention.

The method is used to predict and evaluate the consequences of a decision and to be able to

rank the options. The calculations of CBA show the difference between the scenarios with or

without the project. It can also be a guide to understand and evaluate the value given to

different stakeholders throughout the project. If the project is not carried out the resources

can be used in an alternative way, the value of this alternative way is the projects opportunity

cost (Brown & Campbell, 2003). In a competitive market with no taxes or subsidies, the

market price is exactly equal to its opportunity cost of production (Brent, 1997).

6

The process of a CBA includes identification, measuring and comparison of all costs and

benefits from an investment or project. It is important to express both costs and benefits in

the same units. CBA is a method that evaluates investments or projects in a way that corrects

for market failures. There are impacts and values which have no monetary values, these needs

to be converted to get a true and correct picture of the study. One type of market failure is

externalities, which is when there is no market connection between the person consuming or

producing a good and the people that are affected by this product (Perman, 2003). Both

private and public projects can be evaluated by a CBA. A private project can have costs and

benefits that do not only affect the company but also affect others in the society. For example

if a company chooses to offset their emissions the benefits of reduced emission in the

atmosphere is spread also to other people in society. There would be no use for CBA if there

were no externalities or other distorting effects on the market since resources would already

be distributed in the private, individual and society best way. In a non-competitive or

distorted market the supply and demand is not the same in equilibrium and therefore they

need to be evaluated according to certain rules to find their true value (Brown & Campbell,

2003).

The most important when making a CBA is to address the question and the options under

consideration. Further a decision will be made if the project or policy is going to be

undertaken at all. The analysis shall proceed if estimated benefits exceeds estimated costs,

and do not proceed if estimated benefits fall below estimated costs. It is important to establish

what the optimal scale of the project is to get a perspective and an idea about the project.

The option with the highest benefits should be chosen and further on a decision must be made

when the policy shall get started. It is of importance to decide which policies should be

undertaken first and how policies should be ranked in order of importance. The context ought

to be established, the issue of scale shall be considered and the alternatives set up (Pearce,

2006).

2.2.1 CBA and practical decision-making

The method of CBA is frequently used by decision makers in order to make a prediction and

evaluation of an undertaken project. CBA provides a model of rationality and measures gains

and losses. Benefits are defined as increases and costs as reductions in human wellbeing.

Social benefits must exceed its social costs, for the project to qualify on cost benefits

grounds. A society is the sum of all individuals in the specific area or country. The

geographical borders are normally the nation, where you use CBA but it can be extended to

wider boundaries (Pearce, Atkinson & Mourato, 2006). In this thesis the society is based on

the global population.

CBA is considered as a good method to find out whether it is good for a corporation to offset

emissions or not.

7

The analysis implies that you systematically divide the issues into benefits (B) and costs (C)

in monetary values and take the benefits minus the costs to get the net benefit (N) (Brent,

2006).

(1)

A CBA approach can be done before or after a decision is implemented. When a CBA is

performed before the decision is implemented or under consideration, estimated values are

used. When the CBA approach is used after a decision has been implemented, exact values

and sunk costs are used. This will affect the results of the CBA (Pearce et al., 2006). In this

study we use CBA calculations before the project has been implemented.

2.2.2 Critics of CBA

There are critics and difficulties connected with CBA. One criticism of CBA is that it just

considers the total costs and benefits. If costs and profits are unevenly distributed between

citizens it is assumed that they withdraw one another. Another difficulty is that there can be

disagreements in the work with the analysis, whether for example an effect is a cost or a

benefit. Further difficulties can be how the analysis will look like in a time period, how one

can value the effects and how a tradeoff between present time and future is made.

CBA is used to rank the evaluated alternatives and finally determine and recommend one of

them. The critics have to be taken under consideration in the time of the study, the first

mentioned criticism above, the society perspective with external effects, is of great

importance in the calculations (Pearce et al., 2006).

2.2.3 Net present value of CBA

The aggregated value today of a series of cash flows occurring in the future is called the Net

Present Value (NPV). By looking at the projected cash inflows and outflows the NPV is a

way to decide whether or not to invest in a project. If the value of NPV is greater than 0, the

project is profitable and worth the risk. If the value of NPV is less than 0, the project is not

worth the risk and should not be carried out (Pearce et al., 2006).

Since NPV takes risk and reward into consideration, it is a way to decide if a project is worth

to undertake or if an investment is worthwhile. The aimed percentage profit is important

because it reveals the minimum return the project or investment must make. Furthermore

NPV takes percentage profit into consideration. This means, the value of NPV will change

with different percentage profits. At some rates, the project may be worth undertaking and at

others, it would not.

Many in the corporate world use NPV in conjunction with other factors before making a final

decision.

8

Net Present Value formula

(2)

(3)

Where CFt is the net cash flow at period t, CF0 is the initial cost outlay and i is the cost of

capital or the discount rate. (Westerfield Jaffe, 2005)

2.3 Costs and Benefits

To be able to make a comparison between the impacts of climate change and the costs of

reducing emissions, it is important to express both sides in the same metric. The reduction

costs are usually measured in money which is well suited to measure impacts that affect

market transactions and therefore directly affects GDP. To use monetary metric to measure

non-market impacts such as human lives is harder but possible. This kind of economic

valuation can be controversial and sophistical analyses are required (Pearce, Cline, Achanta,

Frankhauser, Pachauri & Tol, 1996).

2.3.1 Firm and society wide costs and benefits

The cost for the firm is the amount it costs to buy offsetting credits to become carbon neutral.

This cost depends on what kind of credits the corporation decides to invest in.

In the case study performed in this thesis the cost will be calculated based on EUA’s since

they have a specified cost. During the period 2009-2012 the average price of EUA’s are

estimated at €29 (Point Carbon, 2008). The benefits for the firm are harder to estimate.

Through advertising it is possible to strengthen the brand name with a green/carbon neutral

profile of the corporation and hence, increase sales.

Society wide carbon offsetting has the same costs as the firm since the firm is a part of the

society. The benefits for the society are the effect on society from the reduced emissions due

to the compensated amount, the marginal damage cost of carbon dioxide.

2.3.1.1 The marginal damage cost of CO2

The problem when trying to put a value on climate change is that the complicated pattern of

local and individual impacts needs to be simplified to a set of indicators, of impacts in

different regions, sectors and systems that is possible to summarize and compare in a useful

way. To get a sufficient measure that allows for consistent comparison the impact of climate

change on the margin needs to be calculated, the effect of a small change in greenhouse-gas

emissions. This measure although uncertain and controversial is useful as a benchmark for

the policies of emission reduction (Pearce et al., 1996).

The research on economic impact of climate change is still at a relatively early stage and

there are still many questions that remain unanswered. One problem with impact evaluation is

that the understanding of climate change is still incomplete, particularly the understanding of

regional details (Mahlman, 1997). Even though there have been several case studies on the

country-level the knowledge of local differences is still too uneven and unclear which makes

9

comparisons hard to perform. Moreover, differences in assumptions also make it hard to

compare case studies between different countries. The largest knowledge gap exists on the

vulnerability of developing countries, non-market damages, indirect effects, horizontal

interlink ages, and the socio-political implications (Tol, 2004).

The question of adaption is also hard to include in an impact assessment. Adaption implies

behavioral, technological, and institutional changes at all levels of society. The degree of

adaption will differ between different populations groups and regions (Tol, 2004).

There have been several studies on the total impact of climate change in different regions of

the world. Differences in assumptions of climate scenarios, assumptions of adaption, included

impacts and regional disaggregation makes the results hard to compare. In other words, the

current aggregate estimates might underestimate the cost of climate change since they tend to

ignore extreme weather occurrence, ignore costs of transition and learning and underestimate

the compounding of multiple stresses (Keller, Tan, Morel & Bradford, 2000). On the other

hand they might also have disregarded positive impacts of climate change and not sufficiently

calculated on how adaption can reduce impacts (Maddison, 2003).

Even though these studies vary a lot there are still some patterns and trends that appear

According to Tol (2004) one trend is that the impacts on the market are lower than initially

thought and can even be positive in some regions and sectors, mostly in developed regions.

On the other hand, under some conditions market impacts can be severe. A fast increase in

extreme weather events can result in large losses and costly over-adaption. Since developing

countries are depending more upon climate sensitive activities they are also more sensitive to

changes in climate. Another point of view is that more weight has been assigned to non-

market impacts now than in early studies. Differences of impacts will not only be found

between regions, but impacts on individuals, sectors and systems within them will also vary,

some will even benefit while other may suffer severe losses. Furthermore the estimations of

the global impact of climate change depend on the way figures are aggregated. Since impacts

are more severe in developing countries, the more weight put on developing countries the

more severe are aggregate impacts.

In UN’s second assessment report (SAR) the marginal damage cost of 1 ton emitted in

the near future is estimated at US$5-125 (≈€4-1011). The higher estimates arise from a

combination of high vulnerability with low discount rate, most estimates occur in the lower

part of the range (IPCC, 2007a).

2.4 Price elasticity of demand

The price elasticity of demand is the percentage change in quantity demanded divided by the

percentage change in price. It is used in this thesis to see how much corporations can add to

the price of a product without loss in sales.

If the elasticity is greater than 1 in absolute values, there is an elastic demand. The quantity

demanded is very responsive to price. An increase in price by 1 percent will result in quantity

1 Exchange rate retrieved from European central bank (2010-05-05)

10

demanded to decrease by more than 1 percent. If the elasticity of demand is less than 1 in

absolute value, it is an inelastic demand, changes in price have a relatively small effect on the

quantity of the good demanded. An elasticity of exactly -1 implies unit elasticity.

(4)

The average elasticity can be calculated as the ratio of the average price to average quantity

(Varian, 2006). When the price elasticity of demand is high (in absolute values) this implies

that even a small change in price have a large negative impact on quantity demanded. An

inelastic demand implies that the price can be increased without any large impacts on

quantity demanded.

11

3 Case study of Husqvarna AB

3.1 Husqvarna AB

To get a more applicable work Husqvarna AB was asked to cooperate in this thesis. The case

study will be used as decision support to determine if carbon offsetting is of interest for

Husqvarna AB. Estimated values from the firm are used in the calculations and the case study

consider exclusively the Husqvarna brand.

Husqvarna AB is a well-established corporation with 15.000 employees and a turnover of 34

billion SEK (2009). The first plant was founded in 1689. Today the Husqvarna Group is the

world's largest producer of outdoor power products including chainsaws, trimmers, lawn

mowers and garden tractors. The Husqvarna Group's products are sold in more than 100

countries and include products for consumers (67%) as well as professional users (33%)

(Husqvarna AB, 2010).

Husqvarna AB is for us a local corporation with a worldwide well known brand, which was

an essential reason why we choose to make a case study of our thesis in cooperation with

them. We contacted and arranged a meeting with the environmental manager at Husqvarna

AB in Huskvarna. Together we made a well thought-out strategy.

3.2 Strategy

To investigate if carbon offsetting is a profitable strategy for corporations and the society we

make a CBA analysis of carbon offsetting. The carbon offsetting look attentively at the

emissions the products emits during lifetime use, recycling of the products such as transports,

company cars and lorries, business trips and production etc are not included in the

calculations. It is also of great importance to mention that the usage of the product also

depends of its owner and his treatment of the product. The data given from Husqvarna AB

are average estimated data taken from the engine manufacturer, two-stroke engine

manufactured by Husqvarna AB and used to handheld products and four-stroke engine

manufactured by various engine manufacturers and used to wheeled walk behind and

wheeled ride on products.

The carbon offsetting will be accomplished by the performance of five different stages. To

see if carbon offsetting is a profitable strategy, benefits will be compared to the involved

costs. Since the study will be a decision support, estimated values are used and the carbon

offsetting considers the total emissions during the products lifetime.

The first step is to estimate the total cost for Husqvarna AB to offset all emissions from

their production and product use. This is calculated based on estimated data, from year 2009,

obtained from Husqvarna AB. Husqvarna AB includes several different brands and this case

study focuses exclusively on Husqvarna’s own brand. By multiplying the total amount of

emissions by the cost for the equivalent amount of offsetting credits, the total cost to carbon

offset all Husqvarna products sold in a year is found.

The second step is to estimate total costs and benefits of emissions and carbon offsetting

for the society.

As a third step, the NPV of the project is calculated and we get an estimated value of the

costs for carbon offsetting for the company.

12

Fourth, we make a market survey to investigate if there is a demand for carbon-neutral

products. A questionnaire is sent to twenty large retailers of Husqvarna products globally and

the findings will be concluded in section 3.3.4.

In the fifth step the price elasticity of demand is calculated for chain saws, wheeled walk

behind and wheeled ride on, to see the sensitivity of change in price. This is used to see if the

offsetting cost can be added to the consumer price.

3.2.1 Data Collection

The Husqvarna products are divided into different product categories. “Handheld”, “Wheeled

Walk Behind” and “Wheeled Ride On” are the analyzed project groups.

To get the data needed we got in contact with the product managers for each product

category. The product managers provided us with product information about the estimated

average quantity of emissions per hour in use, average hours used during product life,

number of sold products in 2009 and consumer prices.

Further we order the products in minor groups depending on which products that have the

same average emissions per hour. The products which have 0 average emissions per

hour and 0 sold products are removed.

The cost for carbon offsetting is based on EU and UN standards.

3.3 Calculations

3.3.1 Corporative costs and benefits

For the first step, to find the estimated total amount of emitted by Husqvarna brand

products, we first multiplied emissions emitted, gram per kWh, by engine power, kW, to get

the amount of emissions in gram per hour. Further the amount of emissions per hour

is multiplied by the number of hours used during product lifetime and the number of units

sold of each product. In the second column in table 2 below the total amount emitted for each

product category (ton of ) is presented.

Secondly the total amount of emissions that needs to be offset is 1 992 600 ton. The cost

for offsetting this amount can differ depending on what kind of offsetting credits Husqvarna

decides to purchase. In this case study the cost will be calculated based on EUA’s since they

have a specified cost. During the period 2009-2012 the average price of EUA’s are estimated

at €29.

As can be seen in table 2 the total cost for offsetting total emissions is estimated to €57 785

000. To calculate the amount per product the sum is divided by the total number of products

sold in 2009, 1 158 686pcs. This result is presented in the fourth column in table 2.

13

Table 2 Amount of CO2 emitted (tons), offsetting cost (€) and cost /product (€)

Category emissions

(ton)

Offsetting cost (€) Total cost/total number of

products sold 2009 (€)

Handheld 1 947 000 56 463 000 53

Wheeled walk behind 23 000 667 000 8

Wheeled ride on 22 600 655 000 36

Total 1 992 600 57 785 000 50

For the Husqvarna brand to become carbon neutral €57 785 000, an average of €50 per

product needs to be paid.

3.3.2 Society wide costs and benefits

In this case the cost of the society is the cost of the firm since the firm is a part of the society,

and the costs are carried by Husqvarna. Since the estimates of society wide benefits are

uncertain and the range of estimates is wide this will be calculated on different values. The

UN estimated range of €4-101 will be used as a base for this calculation. Three different

calculations are carried out, on the lowest, highest and a value in between.

Table 3, society wide benefits depending on different

estimates (€).

Estimated

marginal damage

cost of emissions

Value of society wide

benefits. The value for

the society of reduced

emissions. (€)

4 7 970 400

29 57 785 000

48,5 96 641 000

101 201 253 000

In table 3 it can be seen that at €4 the society wide benefits will not outweigh the offsetting

cost paid by the firm in the society. At the two highest estimates, benefits will exceed the

costs. For the benefits to exactly outweigh costs the marginal damage cost of emissions

needs to be the same as the cost for offsetting, here estimated at €29 per ton during the

period 2009-2012.

3.3.3 Net present value

To estimate the aggregated value today of the future annual offsetting costs, the NPV is

calculated.

14

As discount rate the average deposit rate is used: 18.9786/9=2.1087333% calculated from the

Riksbank key interest deposit rate 2001-2009 (Riksbanken, 2010). We assume an interest

deposit rate of 2.11 % per year and further that the costs of carbon offsetting remains the

same over the time period of four years, since the average price of EUA´s are estimated at

€29 per ton during the period 2009-2012. To be able to make a comparison what happens

if there is a higher deposit rate, a calculation of the NPV with an interest rate of 6 % is made,

this interest deposit rate is taken as an empirical example.

CI-219 443 517

CI-200 231 128

Since we cannot estimate a numerical value of cash inflows (CI) we get the present value

(PV) of cash out flows for the four following years. To get a positive NPV the cash inflows,

over four years, generated by this carbon offsetting project needs to reach above €219 443

517 when calculate with 2.11% interest deposit rate. With a 6% interest deposit rate we get as

expected a lower value. Since it is difficult to divine the future and to get a truer answer, a

smaller value of interest deposit rate is better to use, because we know that the climate

changes will not improve to the better.

3.3.4 Findings of the survey for retailers

A survey is sent globally to retailers of Husqvarna products to see the response from the

market of carbon neutral products. The consequent findings of the survey are that the retailers

have not noticed an increased demand for carbon neutral products from their customers

during the past 12 months. Further, up to 10 % of the customers of the retailers ask about how

emission efficient different products are. Considering the average customer's willingness to

pay for a climate neutral product, the average is not more than 4% among the customers. On

the question on how the retailers can increase their “goodwill” by offering climate neutral

products the general answer was that it could be helpful but have very little impact.

A conclusion of the market survey will be that today there is not a high demand/request of

carbon neutral products in the market. Partially this can depend on the customers’ insufficient

awareness of carbon neutral products and partially it can depend on the intangibleness of the

effects of emissions.

Husqvarna AB carried out a market survey in Sweden and Germany during fall 2009, about

the interest of environmentally adapted products. Among the participants of the survey were

15

house owners, landscape architects, land operators, and forest workers. The result showed

that professional consumers believe that environmental issues are important and that they are

strongly engaged in their work environment. It was also found that house owners are

interested in environmental questions and that they will require better restrictions on

environmental friendly products (Husqvarna AB, 2009).

From this we can conclude that the European market might be better prepared for carbon

neutral products than the rest of the world.

3.3.5 Elasticity of demand

To estimate how much of the offsetting cost that can be put on the sales price without too

large losses in sales, the price elasticity is calculated. This calculation is carried out for the

three different product categories (handheld is replaced by chainsaws to make the estimation

more correct) where Swedish consumer prices including taxes is used of Husqvarna brand

products in the Swedish market. Since we not calculate on quality controlled products the

price elasticity of demand is not totally proper, the curves would probably be flatter. The

study give a perspective of the price elasticity of demand, the results can be seen in the

graphs below.

Graph 1

As can be seen in graph 1, the slope of the culumative demand curve for chainsaws is -0.017.

This value is multiplied by the

and the result is inverted to get the price elasticity of

demand. The calculations can be seen below.

y = -0,017x + 9630,9

0,00

2000,00

4000,00

6000,00

8000,00

10000,00

12000,00

14000,00

0 100000 200000 300000 400000

Pri

ce

Cumulative quantity sold

Cumulative demand chain saw

Price/product

Linjär (Price/product)

16

=16.83

An absolute value of 16.83 indicates that the price of the product is elastic. A 1% increase of

price reduces quantity demanded by 16.83%. Therefore it is not possible to add a large

amount of the carbon offsetting cost to the consumer price due to high losses in sales.

Graph 2

From graph 2 above it can be seen that the slope of the cumulative demand curve for wheeled

walk behind is -0.0858. The price elasticity of demand is calculated as below.

= 13.94

For wheeled walk behind products the elasticity were found to be 13.94 in absolute value. A

1% increase of price reduces quantity demanded by 13.94%. Hence, as in the case of chain

saws, it is not possible to add a large amount of the carbon offsetting cost to the consumer

price.

y = -0,0858x + 6998,2

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0 10000 20000 30000 40000 50000

Pri

ce

Cumulative quantity sold

Cumulative demand wheeld walk behind

Price per product

Linjär (Price per product)

17

Graph 3

The slope of the culumative demand curve for wheeled ride-on is -3,43. The elasticity is

calculated below.

=9.06

For wheeled walk behind products the elasticity were found to be 9.06 in absolute value. A

1% increase of price reduces quantity demanded by 9.06%. Hence it is not possible to add a

large amount of the carbon offsetting cost to the consumer price.

The high price elasticity obtained for all three categories implies that already a small price

increase give rise to considerable quantity reductions.

3.4 Case study findings

The total estimated cost of carbon offsetting year 2009, including both production and

lifelong product usage, for Husqvarna products was found to be €57 785 000 and the PV for

four years is estimated at €219 443 517. To reach a profitable corporate carbon offsetting the

PV of cash inflows needs to be at least €219 443 517. There are three options to manage the

offsetting costs.

The first one is that the corporation Husqvarna AB funds their emissions, pay the entire

amount of €57 785 000. Second is that carbon offsetting is added to the price of the product

and hence the customer pay the offsetting cost this results in an average price of €50 per

y = -3,43x + 83022

0

20000

40000

60000

80000

100000

120000

0 5000 10000 15000 20000

Pri

ce

Cumulative quantity sold

Cumulative demand wheeled ride on

Price/product

Linjär (Price/product)

18

product. From the elasticity study above we got the result that even a small increase in price

will imply a large reduction in sales. Therefore this strategy is not recommended for

Husqvarna. The third alternative is a voluntary option, the customer can choose if he will pay

extra to get a carbon neutral product. This will not bring any extra cost for the companies, the

customer stand for potential cost, in this case estimated at an amount of €50 per product. If

Husqvarna AB will benefit from carbon offsetting depends on the positive marketing effect.

Since the survey with the retailers show that the market is not yet ready for carbon neutral

products, we suggest the third alternative, let the customer decide to carbon offset or not. This

can prepare the market and hence in a near future the demand for carbon neutral products will

increase.

19

4 Conclusion

Carbon offsetting is a rather new concept, at present there are not many corporations on the

market who take advantage of this possibility, but it is better to beat the market before the

market beats you. It is now a company can earn “good will” by carbon offsetting, when all

companies must do it and it becomes a custom the benefit will decrease because the customer

will take it for granted.

For a company to become carbon neutral, it is important to make revisions in their operations

in order to minimize emissions. In this revision all operations carried out by the

company should be considered. Carbon offsetting should be used as a complement to

compensate for unavoidable emissions. The cost for a company to carbon offset their

emission depend on which carbon offsetting company it chooses to consult and what kind of

offsetting credits they provide.

A company can benefit from a green profile through advertizing, it will stronger their brand

name and reputation. Through advertizing and “good will” the company might benefit on

carbon offsetting in the long run by increases in sales at the same time as the society will

benefit from a healthier environment.

The cost can be paid by the company itself or distributed at the consumer price.

The first alternative is that the company pays the entire offsetting cost. This can pay off if the

benefits increase the sales of an amount that cover the costs. The second alternative,

companies that have inelastic demand are able to add a part of the carbon offsetting at the

consumer price. If carbon offsetting costs adds to the consumer price, the consumer will lose

the extra amount paid but society will gain from a cleaner environment. The effect for the

company is ambiguous, one possibility is that the sale decreases due to increased consumer

price, but on the other hand it can increase sales due to positive marketing effects. A third

alternative is for the company to provide an option to the customer to voluntary carbon offset

the product. It is up to the customer to choose whether they want to pay the extra amount of

money to get a carbon neutral product or not. We found this to be the best alternative for

corporations, since it can benefit from a green profile without any additional costs.

The society will gain from all three options since there are no costs involved for the society,

there will only be positive effects of carbon offsetting, but the third alternative is the least

beneficial for the society since the carbon offsetting amount will probably be less. The

society gain is the sum of the reduced damage costs due to reduced emissions, estimated to 4-

101 € per ton .

We have also drawn a conclusion from the market survey that the market might not be ready

for carbon neutral products due to lack of awareness, ignorance or intangibleness of climate

change problems.

To be one step ahead and be one among the first companies with carbon offsetting products

will benefit the corporation in the long run, since in the future there will be much stronger

laws of emissions and other greenhouse gases.

20

The best thing is to make the product more environmental friendly with reduced amount

emissions due to research and development. However the best alternative for the society will

be to improve the technology so they emit less .

Today a lot of research is carried out within the area of climate change, a subject which

concerns us all, despite this is the area of carbon offsetting yet unexplored. This thesis has

just touched upon the tip of the iceberg.

For further studies market adjustments to reduce emissions can be analyzed. An example

of market adjustment might be to sell electric products to regions where green electricity is

produced and solar cell products to sunny parts of the world. Another interesting part is R&D

to improve fuel efficiency, this mean less fuel and less emissions and hence lower costs for

the costumer to run their products.

The benefits of carbon offsetting are a difficult area and a more thorough investigation would

be interesting.

21

5 References

Brent, R.J. (1997). Applied Cost-Benefit Analysis. Edgar Elgar publishing Limited.

Brent, R. J. (2006). Applied Cost-Benefit Analysis (2nd

ed.). Edward Elgar Publishing limited.

Brown, R., & Campbell, H. (2003). Benefit-Cost Analysis- financial and economic

appraisal using spreadsheets. Cambridge University Press.

CO2focus, (2009). CO2focus homepage. Retrieved 2010-03-05, from

http://www.co2focus.com/eng/acam1.html

DECC. (2010, February). A short guide to carbon offsetting. Retrieved 2010-04-10, from

http://www.direct.gov.uk/en/Environmentandgreenerliving/Thewiderenvironment/DG_07006

0

EIA. (2008, May). Greenhouse gases, Climate Change and Energy. Retrieved 2010-03-16,

from http://www.eia.doe.gov/bookshelf/brochures/greenhouse/Chapter1.htm

Swedish Energy Agency. (2009, September). Reduktionsenheter vid klimatkompensation.

Retrieved 2010-03-20, from

http://www.energimyndigheten.se/sv/Foretag/Klimatkompensation/Reduktionsenheter-vid-

klimatkompensation/

European Central Bank. (2010, May). Euro foreign Exchange reference rates. Retrieved

2010-05-05, from http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html

Husqvarna AB. (2010). Annual report 2009. Retrieved 2010-02-13, from

http://corporate.husqvarna.com/index.php?p=ir&s=reports&t=detail&afw_id=1157095&afw_

lang=en

Husqvarna AB. (2010, May). Highlights 2009. Retrieved 2010-05-10, from

http://corporate.husqvarna.com/index.php?p=about&afw_lang=en

IPCC. (2007a, November). Fourth assessment report, Climate change (AR4), "Impacts,

Adaptation and Vulnerability". Retrieved 2010-03-05, from

http://www.ipcc.ch/ipccreports/tar/wg2/677.htm

IPCC. (2007b, November). Fourth assessment report, “Synthesis report- An assessment of

the Intergovernmental panel on climate change”. Retrieved 2010-03-05, from

http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_synt

hesis_report.htm

Kaur, K. (2008, February 1). Åtta svenska klimatforskare som går emot strömmen.

Miljöaktuellt. Retrieved 2010-04-16, from http://miljoaktuellt.idg.se//2.1845/1.110978

Keller, K., Tan, K., Morel, F.M.M., & Bradford, D.F. (2000). Preserving the ocean

circulation: implications for climate policy. Springer Netherlands.

22

Kirby, A. (2008). Kick the habit- A UN guide to climate neutrality. Progress Press LTD-

Malta

Maddison, D.J. (2003). The amenity value of climate change: The household production

function approach. Elsevier Science B.V

Mahlman, J.D. (1997, November 21). Uncertainties in projections of human-caused climate

warming. Science. Retrieved 2010-02-14, from

http://www.sciencemag.org/cgi/search?src=hw&site_area=sci&fulltext=Uncertainties+in+pro

jections+of+human-caused+climate+warming

Myclimate, (2010). Tangible climate protection with Myclimate. Retrieved 2010-03-05, from

http://www.myclimate.org/en.html

Naturvårdsverket, (2006 May). 0605 Klimataktuellt. Retrieved 2010-03-18, from

http://www.naturvardsverket.se/sv/Klimat-i-forandring/Klimatinformation/Klimataktuellt--

Senaste-nytt-om-klimatforandringen/Gamla-utgavor-av-Klimataktuellt/

Naturvårdsverket, (2009 September). Klimatkonventionen och Kyotoprotokollet

Retrieved 2010-04-10, from http://naturvardsverket.se/sv/Klimat-i-

forandring/Klimatpolitiken/Internationell-klimatpolitik/Klimatkonventionen-och-

Kyotoprotokollet/

Norska Nobelkommittén, (2007). Nobels fredspris 2007. Retreived 2010-02-05, from

http://nobelpeaceprize.org/nb_NO/laureates/laureates-2007

Pearce, D,. Atkinson, G., & Mourato, S. (2006) Cost Benefit Analysis and the Environment,

Recent Developments, OECD Publishing.

Pearce, D.W., Cline, W.R., Achanta, A.N., Frankhauser, S., Pachauri, R.K., & Tol, R.S.J.,

(1996). The social costs of climate change: greenhouse damage and benefits of control.

Cambridge University Press.

Riksbanken, (2010). Repo rate, deposit and lending rate. Retrived 2010-04-03, from

http://www.riksbank.com/templates/stat.aspx?id=17184

UNFCCC, (2008). Kyoto Protocol. Retrieved 2010-03-10, from

http://unfccc.int/kyoto_protocol/items/3145.php

US EPA, (2010). Health and environmental effects. Retrieved 2010-05-02, from

http://www.epa.gov/climatechange/effects/index.html

Utsläppsrätt.se, (2010). Om Utsläppsrätt.se. Retrived 2010-03-05, from

www.utslappsratt.se

Varian, H.R., (2006). Intermediate Microeconomics (7Th

ed.). Norton & Company, Ltd.

Westerfield Jaffe, R. (2005). Corporate finance (7th

ed.). McGraw Hill.

23

6 Appendices

6.1 Myclimate

Myclimate – The Climate Protection Partnership is one of the leading companies when it

comes to voluntary carbon offsetting, it is a non-profit organization founded in Switzerland in

2002. All available offsetting projects follow the strictest standards (Clean Development

Mechanism, Gold Standard). Myclimate is science-based and market-oriented and offers

packages for carbon offsetting. Companies can easily calculate their emissions on

Myclimate’s webpage org) by filling in the “company calculator”.

The marginal cost for each project is calculated prior to any commitment of Myclimate for

evaluation of additionality. Projects that would have been implemented anyway, or which

would only have earned extra profits through Myclimate contributions are not supported.

The price per ton CO2 is the difference between fossil and renewable energies technologies

divided by the emission reduction over a defined period of time. Each and every project

offers different prices per ton CO2 due to the dependency on size, implemented technology,

country, etc. Most companies’ purchases portfolios, Myclimate has two different portfolios of

different projects to offer and the average price is calculated accordingly. The Myclimate

portfolio Gold Standard comprises international projects spread all over the world, the price

for this is EUR 24 per ton CO2. When offsetting within the Myclimate Switzerland portfolio

half of the emissions are offset in Swiss projects, the other 50% in projects in other countries

mounting up to CHF 120 per ton CO2 (≈EUR 86 per ton CO2). For both portfolios, volume

discounts for amounts over 1,000 ton CO2 are available.

Myclimate has developed a climate neutral label for especially responsible companies who

are striving to reduce their emissions and buy reduction units through Myclimate for

unavoidable emissions. The climate neutral label is an approach to communicating the firms’

commitment (Myclimate, 2010).

6.2 CO2focus

CO2focus is an independent international advisory group within voluntary action on climate

change. They are the leading company within climate management in the Nordic region with

about 150 Nordic corporations on their customer list who altogether have purchased about

75000 CERs.

24

CO2focus provides climate management services such as carbon trading, management

consulting, engineering, sales and marketing. They are specialized in the development of

efficient tools to enable a systematic work on climate management. Guidelines and methods

are gathered from the UN-report “Kick the habit- A UN guide to climate neutrality”, (2008).

Efficient climate management demands a well established climate report of firm operations.

The model used by CO2focus is based on the international standard for greenhouse gas

protocol initiative, (the GHG-protocol) which is the most important international standard for

measurement of greenhouse gases. Climate neutrality can imply a climate neutral

organization, a climate neutral activity or a climate neutral product. In the case of a climate

neutral product the whole life cycle of the product needs to be taken into perspective.

CO2focus are specialized in selling CER-credits which are part of the Clean Development

Mechanism). By the purchase of one CER-carbon credit (1 ton ) one specific project

which reduces emissions of greenhouse gases is supported. Furthermore the development in

the actual country, region or village is also supported.

Only premium projects such as renewable energy based on biomass, solar, wind or

geothermic power are implemented.

For clients to be able to communicate their contribution, different climate neutral labels have

been developed. All clients that go through the carbon management process, emissions have

been measured for all operations, identification of reduction and offsetting of remaining

emissions, receives a CO2focus Climate certificate. When emissions are reduced to net zero

the client receives the certificate for either a product, a service or the entire organization, this

also allows them to use the correct climate neutral label for communication (see picture

below) (CO2focus, 2010).

6.3 Utsläppsrätt.se

Utsläppsrätt.se is run by the non-profit organization Emisso and is a provider of carbon

offsetting based in Sweden. It was founded in 2006 and was then one of the first companies

in the Swedish market to offer climate compensation. Utsläppsrätt.se has chosen to work

exclusively with EUAs for their credibility and ease of use and because the emissions

reduced by EUAs are in industrialized countries which are where emissions are highest.

Emission allowances are sold from EU-ETS in order to help customers to become carbon

neutral. Utsläppsrätt.se is a participant of UNEP-Climate Neutral Network since 2008 which

is a part of UN’s Environmental Program (Utsläppsrätt.se, 2010).