Financing Technological Improvements

and Firm Competitive Advantage

Through the Kyoto Protocols
Clean Development Mechanism (CDM):
A Latin American Example
Henry L. Petersen
Luis Fernando Escobar
Juan Leonardo Espinoza
Harrie Vredenburg

ABSTRACT. For nations of the global south there has been an overall
dismissal of emissions reduction practices surrounding global warming,
and perhaps rightfully so. Developed countries have been identified as the
primary contributor towards the climate change issue, and many countries perceive that the curbing of emissions will lead to the stagnation of
economic growth and prosperity. For developing nations, embracing
emission reductions or carbon emission offsets appear to make little
Henry L. Petersen is affiliated with the School of Business and Economics, Seattle Pacific University, 3307 Third Ave West, Seattle, WA 98119-1950 (E-mail: hlp@spu.edu).
Luis Fernando Escobar is affiliated with ABD TC Institute for Resource Industries and Sustainability Studies (TC-IRIS), Haskayne School of Business, University
of Calgary, 2500 University Dr, NW Calgary, Alberta, Canada T2N 1N4 (E-mail: luis.
escobar@haskayne.ucalgary.ca).
Juan Leonardo Espinoza, is affiliated with TC Institute for Resource Industries and
Sustainability Studies (TC-IRIS), Haskayne School of Business, University of Calgary,
2500 University Dr, NW, Calgary, Alberta, Canada T2N 1N4 (E-mail: juan. espinoza
@haskayne.ucalgary.ca).
Harrie Vredenburg is Director, TC Institute for Resource Industries and Sustainability Studies (TC-IRIS), Haskayne School of Business, University of Calgary, 2500
University Dr, NW, Calgary, Alberta, Canada T2N 1N4 (E-mail: harrie.vredenburg
@haskayne.ucalgary.ca).
Latin American Business Review, Vol. 6(4) 2005
http://www.haworthpress.com/web/LABR
2005 by The Haworth Press, Inc. All rights reserved.
doi:10.1300/J140v06n04_02

23

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LATIN AMERICAN BUSINESS REVIEW

sense if in fact such actions would result in the economic contraction

expected. However, we suggest that the climate change issue, although
perceived as an obstacle to growth and prosperity, holds several strategic
competitive advantages for first movers. Three factors are discussed
regarding first mover advantage and we use the energy industry of the
Latin American and Caribbean (LAC) region as our example.
RESUMEN. Para las naciones del sur global, ha habido un rechazo
general, quizs apropiado, de la reduccin de las prcticas relativas a las
emisiones sobre el calentamiento global. Se ha identificado que los pases desarrollados son los principales contribuyentes altema del cambio
climtico, y muchos pases perciben que el acto de frenar las emisiones
llevar al estancamiento del crecimiento econmico y la prosperidad.
Para los pases desarrollados, parece tener poco sentido comn abrazar
la causa de reducir las emisiones o compensar las emisiones de carbono
si, de hecho, estas acciones resultarn en la esperada contraccin de la
economa. Sin embargo, sugerimos que, a pesar de percibirse como un
obstculo contra el crecimiento y la prosperidad, el tema del cambio
climtico ofrece varias ventajas competitivas para los que den el primer
paso. Se discuten tres factores respecto a la ventaja para el que tome la
iniciativa, y usamos la industria energtica de la regin latinoamericana
y caribea (LAC), para ilustrar nuestro ejemplo.
RESUMO. As naes do sul do globo terrestre tm verificado um retrocesso geral, conveniente, nas prticas de reduo de emisso de gases que
envolvem o aquecimento da terra. Os pases desenvolvidos so os que
mais contribuem para o fenmeno da mudana climtica, e muitos pases
entendem que a diminuio das emisses conduziro estagnao da
prosperidade e do crescimento econmico. Para as naes em desenvolvimento, adotar a reduo das emisses ou compensar a emisso do gs
carbnico no parece fazer muito sentido, se tais aes, de fato, resultarem
na retrao econmica esperada. Sugerimos, contudo, que o tema da
mudana climtica, embora seja considerado um obstculo ao crescimento
e prosperidade, oferea diversas vantagens competitivas estratgicas
para os que tomarem esta iniciativa. Trs fatores so discutidos em relao
vantagem daqueles que derem o primeiro passo, e usamos, como
exemplo, a indstria energtica das regies da Amrica Latina e do
Caribe. [Article copies available for a fee from The Haworth Document Delivery
Service: 1-800-HAWORTH. E-mail address: <docdelivery@ haworthpress.com>
Website: <http://www.HaworthPress.com> 2005 by The Haworth Press, Inc.
All rights reserved.]

KEYWORDS. Climate change, strategy, competitive advantage

Petersen et al.

25

In the last decade, Global Warming has become a legitimate issue.

From pre-industrial times to today, anthropogenic emissions are said to
have increased the tropospheric concentrations of greenhouse gases
(GHG), i.e., carbon dioxide (CO2) and methane, by 28% and 112%, respectively (Carbon Dioxide Information Analysis Center, 2001). For
this reason, many nations have confirmed and agreed that their respective emissions may be contributing to the potential warming of the climate, and they have already started to take action. Following the 155
country ratification of the Framework Convention on Climate Change
(FCCC) at the Earth Summit in Rio de Janeiro, the Kyoto Protocol was
forged in 1997 to bind signatory nations to emission reduction targets.
Once the protocol was ratified by 50 of the 156 participating nations, or
55% of global carbon emissions, a global contract would come into
effect, thereby limiting each of the developed nations GHG emissions.
As of April 2005, 150 nations have ratified, accepted, accessed or approved the protocol, making Kyoto1 the primary global pact addressing
the climate change issue and binding signatory countries to emissions
controls and reduction.
As a means of assisting participating countries and their respective
industry in reducing carbon emissions, flexible mechanisms were added
to the Kyoto Protocol. These mechanisms provide participating nations
and their respective industry a degree of discretion to utilize market
forces in their efforts to reduce emissions and be in compliance with the
protocol. Despite their initial political strategy of lobbying regulatory
regimes to keep from imposing emission reducing policies, the business
sectors in these nations are experimenting with such mechanisms nonetheless. In preparation for a limit on emissions, some firms in the global
north have taken one of two different strategies for managing the climate change issue: innovation or compensation (Kolk and Pinske,
2005). In the first instance, innovation is a strategy that seeks to add to
the organizations assets and competencies through research and development. The strategy is to seek to stake a competitive position in the
future by adding to the organizations asset base through technological
change. In the latter situation, compensatory action involves the use
of carbon trading systems, whereby organizations experiment with
emission limits and offsets or credits that are offered on carbon markets.
For many organizations, these strategies are voluntary until such a time
as their governing authorities establish limits. But the adoption of
voluntary reductions is on the rise, even in the US, where the current
administration refuses to participate in the Kyoto protocol (Hoffman,
2005). Although several carbon trading markets have been piloted over

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LATIN AMERICAN BUSINESS REVIEW

the last few years, we are now witnessing the emergence of sizeable
markets that not only cross industry and country boundaries, but have
incredible economic potential (Baron, 2000). The European Emissions
Trading System, set to open this year (2005), is expected to operate
among 15 participating countries and their respective industry (Victor
and House, 2004). The point is that the strategic behaviors of innovation
and compensation are an indicator of activities in response to the Kyoto
protocol, climate change and a carbon constrained future, and many
firms are experimenting with these mechanisms.
BP, Royal Dutch Shell, TransAlta Utilities, Duke Energy and Nike
are but a small sample of a much larger list of enterprising companies2
from the industrialized world seeking to strategically reduce their emissions and pilot sequestration projects in anticipation of carbon restraints. However, the carbon trading market is confined to Annex B
nations. Annex B nations are those that have a defined emissions reduction plan under the terms of the protocol; they are nations that are primarily developed or in transition. In other words, participants of carbon
trading are confined to the industrialized north. Yet, despite this omission of non-Annex B nations, or developing nations, we believe that
there are significant strategic opportunities for firms of the global south
(Painuly, 2001). However, part of the problem of getting organizations
of the global south to recognize this environmental issue (climate
change) as a credible strategic opportunity will be the removal of a few
perceived barriers. We believe that these barriers function as a veil, covering or disguising the opportunities as unsupportable, economically
poor investments. In this paper, we discuss these barriers in brief,
provide a brief literature review of first mover advantages with respect
to the natural environment, and then provide an example of how a
mechanism under the climate change issue can result in a competitive
opportunity.
Barriers to the Adoption of the Climate Change Issue
For many developed and developing nations, embracing emission reductions is considered an economic setback. The costs associated with
mitigating global warming are staggering. The U.S. Council of Economic Advisors has estimated that the cost for the U.S. economy to reduce its emissions by 20% by the year 2100 would be approximately
$US 3 trillion (Levy, 1997). Likewise, the Canadian market expense to
lower emissions in line with Kyoto prescriptions is projected to potentially impact its economy by as much as $44 billion (Donnelly 2000).3

Petersen et al.

27

For the most part, global warming has been identified as a developed
country issue, even though the climate change issue is a global problem.
Hence, carbon emission reduction for developing countries and their
respective industries makes little sense if in fact such actions would result in economic contraction. On top of that, non-Annex B countries,
those in developing status, are exempt from participating in emissions
trading, further alienating this segment of the world. In light of this, we
discuss three specific phenomena that we believe have turned organizations of the global south away from seeking opportunities within the
climate change issue: environmental orientation, climate change contribution and industry isomorphism. These factors are briefly discussed
using the energy industry of the Latin American and Caribbean (LAC)
region as our example.
First, with respect to protecting the environment, among all of the
different stakeholders that influence managerial decision making, regulators have been highlighted as being the most effective. Regulatory enforcement for industry compliance with legislation that protects the
environment is considered an effective means of controlling firm and
executive behavior (Henriques & Sadorsky, 1996); it is especially effective where there is a trade-off between profits and protection of the
environment. However, for the climate change issue, this regulatory
influence would be borne out of public policies that recognize the importance of the natural environment and which emphasize its protection
and preservation. In the global south, with respect to climate change and
the environment, this is questionable. Being that the energy sector is
one of the primary emitters of GHGs, few countries in the global south
have environmental legislation specifically targeted to this sector, and
what environmental legislation there is, is poorly enforced (Reinsch &
Tissot, 1995). In Latin America, for example, environmental regulations
often conflict with energy sector laws, which then creates confuion and
conflicting goals (Barrera-Hernandez, Lucas, McCoy and McCready,
2000). Often the results are regulatory incentives that favor growth
and production over environmental concerns, resulting in policy decisions that dismiss environmental protection and perhaps the adoption
of emissions reductions. Since the climate change issue is associated
with environmental activities, there would be an overall administrative emphasis on enhancing energy output over pollution abatement
or emissions reducing technologies/practices, indicating that their
environmental orientation is slighted and that protecting the environment is considered a hindrance to development and growth.

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LATIN AMERICAN BUSINESS REVIEW

There is also the issue of government support for the climate change
issue. With respect to that issue, and any projects surrounding its mitigation, countries, on an individual basis, must establish a definition for
sustainable development and also clarify what would constitute as a
verifiable emissions reducing project. Countries that are willing to participate in CDM projects must, as a requisite, establish a carbon baseline, a monitoring plan and additionality of carbon projects. There is
reliance upon governing authorities before organizations can participate
and potentially take advantage of CDM opportunities.
Second, and tied to the first, there is also the issue of the LAC regions
contribution to the climate change issue. The LACs electricity sector
emits approximately 230,000 gigagrams (Gg) of CO2. This represents
approximately 21% of the total CO2 emitted by the region (Pistonesi, Rodriguez Padilla and Chvez, 2000). This is a considerable percentage, but
it is a small fraction of the approximately 6,000,000 Gg the U.S.A emits
per year, or the 14,212,000 Gg (Zittel and Treber, 2000) emitted by the
developed nations as a whole. On an allocation of contribution basis,
there is no reason to expect the region to consider legislative policies or
financial expenditures to support a reduction in emissions that could consequently impede energy growth or development.
Finally, with respect to individual firms, it is unusual for one firm to
be more proactive than its peers with regards to environmental performance. Most regional utilities in the energy sector tend to mirror one
another. This phenomenon is a result of the institutional forces that
exist within an industry. Tacit norms, values and beliefs developed by
the people in the industry and the surrounding region act to encourage
organizations to conform to particular behaviors and not to engage in
new or unusual tactics. The result is a perception that conformance
means easier access to resources and ultimately survival (Kondra &
Hinings, 1998). This then creates risk aversive behavior and imitation,
or what is termed institutional isomorphism (Meyer & Rowan, 1977).
In the LAC region, the institutional forces of some industries induce
managers to perceive the implementation of environmental technologies4 as an unnecessary cost to their operations (Porter and van der
Linde, 1995a; 1995b). This then invokes a classic race to the bottom
mindset with respect to environmental initiatives and competition
(Scherer and Smid, 2000). In line with governing body priorities,
these organizations will seek energy growth or other more common
or recognizable industry opportunities over pollution abatement or
environmental initiatives, since these would not be considered a priority
or strategically advantageous.

Petersen et al.

29

Without regulatory incentives, constant pressure to maintain the status quo and a rejection of any responsibility regarding the climate
change issue, there will be a global warming disassociation. It is this
perceived veil which we believe keeps organizations and their respective executives from identifying or even considering competitive
opportunities involving the global warming subject. Figure 1 demonstrates how these factors alter the perception of climate change as being
a developed country issue and an obstacle to economic prosperity.
However, moving past these barriers to seize the opportunities, organizations must reconcile their indifference to investments in the natural
environment and the perception that these investments are deleterious.

THE ENVIRONMENT IN STRATEGY

For many years there was a prevalent belief that corporate investment
in environmental protection would harm the financial position of the
firm. The primary mindset was that investing in the environment was a
cost with no return. More importantly, investing in the natural environment was not a means for optimizing shareholder wealth. Expecting
that shareholders were unimpressed with environment investments,
corporations shied away from any type of significant investment in
the environment or even advertised such if one was made. Over time,
FIGURE 1. First Mover Advantage
A
CLIMATE
LAC Firms

First Mover
Advantage

Competitive
Advantage

CHANGE

B
Proactive
Firms

First Mover
Advantage

Competitive
Advantage

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LATIN AMERICAN BUSINESS REVIEW

however, some firms accepted being environmentally responsible.

Through significant regulatory enforcement and high stakeholder expectations, some firms developed capabilities to improve on their
performance for managing both their environmental impacts and the
stakeholders involved. Yet many other firms delayed or resisted the environmental revolution, maintaining the view that there was a fixed
trade-off between investing in the environment and that of achieving
optimal economic performance.
A specific stream of literature focused on the motives for managing
the natural environment. Some cited financial reasons for green behavior and attempted to legitimize this behavior through the analysis of
abnormal returns on the stock market (Hamilton, 1995; Jones et al.,
1994), and through enhanced shareholder value (Dasgupta, Hettige
and Wheeler, 1997; Dierickx and Cool, 1989; Russo and Fouts, 1997;
Klassen and Mclaughlin, 1996). Others identified subjective reasons
that were firm specific, such as reputation and public acceptance (Marziliano, 1998; Kinkead, 1999; Kanter, 1999; Leiss, 2000). The point is
that there were specific strategic reasons for engaging in environmental
issues and these were not simply in response to risks. Both Sharma and
Vredenburgs (1998) and Porter and van der Lindes (1995a) assessment of proactive and reactive firms found that proactive organizations
foresaw improved environmental performance as a means to gain a
competitive advantage over their competitors. The natural environment
was not seen as a threat but rather as an opportunity. In other words,
there was a growing environmental market consisting of the sustainable
development kind where investing in the natural environment was a
legitimate strategic option. As Hart (1997) pointed out in his paper
Beyond Greening, sustainable development is not only a strategic
option, but it will also constitute one of the biggest opportunities in the
history of commerce.
Therefore, with respect to strategy, an element required for the forming of a corporate strategy is the recognition of what is shaping the competitive field so that the firm can stake a position that is less vulnerable
to attack from head to head opponents (Porter, 1979). The recognition
of where the corporation stands within its market, and with respect to
the natural environment, will allow the organization to devise a strategy
that may enable it to defend itself and to potentially exploit areas that
may yield a competitive advantage, even if that competitive advantage
is within the environmental arena. Hence, identifying the prevailing
view of the fixed trade-off between the ecological and the economical
approach, and attempting to converge the two through innovation and

Petersen et al.

31

resource productivity in forming a corporate strategy may bring about

new market opportunities and a resulting competitive advantage (Porter
and van der Linde, 1995a). The precept is that environmental improvements may pose an economic and competitive opportunity. However,
they will only be available to those firms that are able to recognize and
implement the environmentally conscious principles associated with
the adoption of the climate change issue. In line with Hart (1997), there
is considerable potential within the natural environment and sustainable
development for competitive opportunities; organizations must recognize that environmental opportunities might actually become a major
source of revenue growth. The movement towards a perspective that
encompasses environmental management as a core strategic position is
the first step towards the attainment of a competitive edge (Hart, 1997;
IFAC, 1998). This, we believe, is definitely the case with the climate
change issue. The next step is the acquisition of resources.
Prospectors Early Mover Advantage
The attainment of a competitive advantage is generally accomplished
through the exploitation of either a resource or position in the market. In
order to do this, the organization must develop or acquire an asset or capability that is capable of increasing the organizations value. Once this
is achieved, the organizations competitors (those without the asset or
capability) will recognize their competitive disadvantage and attempt to
negate or neutralize the advantageeither that or remain at a competitive
disadvantage, which would be deleterious to the longevity of the organization and would demonstrate strategic incompetence. Hence, competitors will attempt to mimic or substitute the competitive advantage.
This is another form of industry isomorphism (the term iso meaning
equal, and morph indicating change). Accordingly, for an organization that acquires an advantage, if the advantage or the resource that
generated it is not so easily copied or negated, then it becomes a sustainable competitive advantage.
There are several scenarios for the development of a sustainable
competitive advantage or first mover opportunity. For instance, an unequal distribution of information and/or resource(s) may provide a first
mover an opportunity or competitive advantage. The asymmetrical distribution of such information has the potential to result in a competitive
advantage if the holding firm is able to use the information to create
value for the firm. Since it is asymmetrical, the information is not
equally distributed and therefore is not in the possession of competitors.

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LATIN AMERICAN BUSINESS REVIEW

In this paper, we provide such information that is considered to be beneficial and which may lead to a competitive advantage. We also believe
that the information provided here could convince executives to see the
potential opportunities associated with global warming, to look past the
barriers we have just listed, and to take the advantage. However, information alone would be insufficient without action. Using the resourcebased view of the firm, a first mover advantage occurs when one of three
conditions exists: resource rarity, predictability or luck (Lieberman and
Montgomery, 1988; Barney, 1991) (see Figure 2).
In the first condition, a rare resource indicates a resource that is uncommon, valuable and non-substitutable (Barney, 1991). Resources
may be tangible, physical and quantifiable assets, or intangible assets
that are difficult to quantify or measure, especially on the balance sheet.
Hence, these resources can range from physical assets (Dierickx and
Cool, 1989; Hall, 1992; Coyne, 1986), such as technological leadership
or strategic location, to special contracts with key customers, an organizations reputation or even its intellectual capital. The point is that the
resource, in whatever form it takes, must add value to or benefit the firm
either in the present or in the future. However, the worth of the resource
is also determined by its distribution or unequal distribution. If in fact
the resource adds value to the organization and is also inaccessible to
competing firms, then that resources value increases considerably.
Having a value added resource that is rare allows the firm to exploit that
resource for a sustained amount of time; that is, if competitors cannot
find a substitute. If other competing firms do not have access to the
FIGURE 2. Industry Asymmetry

Petersen et al.

33

valuable resource and cannot find a substitute to replace it because it is

considered non-substitutable, which thus effectually negates the competitive advantage, then the resources value will not only increase but
will also provide the firm with a sustainable competitive advantage.
The next two plausible conditions for the advent of a first mover advantage are luck and predictability. By chance, a firm may come across
information or a resource that can be used by the firm to gain a benefit.
If the firm holding the resource did not purposely acquire or develop it,
then such would simply be good fortune, and it would be continued
good fortune if that firms competitors were unable to acquire the resource. However, as a strategy, relying on luck to compete against competitors is a recipe for failure. Predictability, the ability to foresee the
future, entails opportunistic circumstances in which an organization
makes the necessary changes to achieve a competitive advantage. In this
condition, access to information that pertains to a certain future is as unlikely to be successful as is having luck for a strategy. Of course, both
conditions are plausible, but they are really outside of the realm that
management executives are responsible for with respect to crafting and
executing a strategy.
With respect to the energy industry in the Latin American and Caribbean region, the opportunities for developing a competitive advantage
via the acquisition of a rare resource are limited. Research and development and the advent of new technologies are not as common as what
would be observed in developed nations (Porter and Stern, 2001) because of the capital intensity required for this type of activity.5 Given
that firms of the energy industry have isomorphic tendencies, as we
have already discussed, it is unlikely that significant efforts are being
made to create or discover new firm technologies for the sake of competition. The implication is that if a first mover opportunity were to arise
for firms of the global south, technological advancement would not necessarily be it. We actually suggest that energy utilities are not competing with one another for market share as much as they are competing for
survival. Most utilities that are fortunate enough to be connected to their
nations primary electricity grid are focused on reliability and power
rates and not on competition per se.
The Ecuadorian electrical sector serves as an example. The generating capability of its industry has been plagued by mandatory brownouts
which are cycled through the country at different times of the year. Severe droughts in the region have had a direct affect on hydro producers.
The subsequent undersupply of water necessary for electricity generation has increased the gap between supply and demand. This in turn has

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LATIN AMERICAN BUSINESS REVIEW

placed a larger strain on the thermo, diesel or coal generators as they try
to meet the regions shortfall.6 Since many of these generators are outdated and in need of replacement (INECEL, 1993), the spiral continues,
with survival being a foremost concern. The industry is focusing on
meeting the countrys demand and remaining reliable. With a struggling
economy and a desperate need for growth, competition is more or less
based on survival of the fittest.
There is also the issue of increased competition from foreign investment. The electricity sector of the LAC region has seen a continual
stream of privatization, which has thus increased competition in the region. The increase in demand and the lack of capital have created a thirst
for new investment. The past decade has witnessed the privatization of
many electric sectors in the LAC region. Markets that were completely
controlled by the state are now racing towards a free market system.
Chile has privatized its utilities; Colombia has established a mix between a free market and state controlled system, and other countries
such as Venezuela, Ecuador, Brazil and Mexico are now allowing the
participation of private corporations (Pistonesi, Rodriguez Padilla and
Chvez, 2000). However, this influx of multinational enterprises could
prove deleterious for local firms. If most local utilities are unable to upgrade and compete against the new entrants due to the capital required
and the stigma of isomorphism generated within the industry, as we
have mentioned, then not only will local LAC firms fall to a competitive
disadvantage, but they will not survive at all. For this reason, and what
we have argued thus far, we believe that the flexible mechanisms within
the Kyoto protocol will be absolutely advantageous for organizations of
the global south. These mechanisms will provide an avenue for the
transfer of rare resources such as newer technologies and/or organizational capacities. Organizations that begin to engage climate change offices (with their respective governing authorities) and seek ways to
participate in identifying emissions reductions increase the probability
of participating in a CDM and of ultimately attaining a rare resource
to become a first mover with respect to their local competition. This is
the first mover advantage opportunity available through CDMs of the
Kyoto Protocol.
WHAT DOES IT LOOK LIKE?
The Kyoto protocol outlines potential means for reducing global greenhouse gas emissions. One such instrument is the Clean Development

Petersen et al.

35

Mechanism (CDM).7 The CDM is a process that facilitates the transfer

of technology and/or capabilities between developed and developing
countries. Outlined in Article 12, the CDM was proposed to enable Annex B parties that are subject to emission limits to invest in developing
countries or non-Annex B parties and, in exchange, receive emission
credits to apply to their own quota. Although the framework and procedure for the CDM is still at an early stage, the latest agreement reached
by the Conference of the Parties (COP) Marrakesh Accord and Declaration8 has brought the CDM closer to reality. The opportunity to be one
of the first organizations or companies to participate in and be a recipient of a technological capability and/or capital from a developed country remains wide open. The clean development mechanism enables an
Annex B nation to transfer technology to a non-Annex B nation and ultimately receive emissions credits. These credits can then be applied to
the organizations quota or sold on the carbon market. The recipient of
the technology, a firm within a non-Annex B country, will have received a technology upgrade. Simply put, an LAC firm that participates
in a CDM will increase its opportunity to realize new technologies, potentially attract additional capital, gain advanced practices and improve
its environmental conditions. This need not be a complicated undertaking for the local LAC region firm. GHG emissions reduction can occur
by simple pollution control or pollution prevention strategies. A study
conducted by five US Department of Energy (DOE) laboratories determined that numerous cost-effective energy-efficient technologies remain underutilized and that if feasible ways were found to implement
these carbon reducing methods, the energy savings produced would
roughly equal or exceed the costs required to implement the technology
or program/policy. If in fact cost-effective energy efficient technology
is so underutilized, then a technological transfer would be both simple
and instantly impacting. The impending emissions-constrained future
and the prospect of the CDM would facilitate a retrofit or upgrade of an
LAC region utility by a firm from an Annex B nation (see Figure 3).
In 2000, the electricity generated in the LAC was close to 960,000
GWh; 63% of the generation was hydroelectricity, with the rest coming
primarily from aging thermo-power plants (OLADE, 2002). These
aging plants have been further strained with the recent droughts in the
area. Because of the lack of rainfall, hydroelectric plants have been
unable to meet the electricity demand. This has brought about not only
power rationing but reforms in the sector in order to reduce hydropowers share and increase thermoelectric generation using fossil fuels
such as coal, oil derivatives and natural gas (IEA, 2001). The projected

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LATIN AMERICAN BUSINESS REVIEW

FIGURE 3. LAC Industry Asymmetry

CLIMATE
Industry
Isomorphism

Foresight/
Predictability

First Mover
Advantage

Competitive
Advantage

CHANGE

increase in emissions is inevitable; however, the CDM may assist in facilitating the implementation of cleaner technologies. If we consider
that natural gas is the least carbon intensive fossil fuel, the idea of refitting a coal-based power plant to burn natural gas is very attractive.9 Refitting existing power plants with circulating fluidized bed (CFB)
boilers or integrating a gas turbine to form a combined cycle can be
more cost effective than building new power plants. In fact, refitting can
increase capacity and improve plant efficiency (IEA, 2000). Currently,
in the LAC region there are several coal-based power plants located in
countries such as Argentina, Brazil, Colombia and Mexico, which
could benefit from such a retrofit.
For example,10 suppose a 200 MW power plant is working at full
capacity 300 days/year. Using coal, this plant emits approximately
1,440,000 tons/year of CO2. If the plant is retrofitted and switched to
natural gas, the emissions will be reduced to 864,000 tons/year. That is a
difference of about 576,000 tons/year. The difference can either be assumed by a firm in an Annex B country or sold on an emissions trading
market. Estimates vary, with some speculating that carbon will have a
trade value of $US 7 per ton. In this example, the marketable carbon
credit would be worth just over $US 4 million per year.
The evaluation of any plant for retrofitting includes a wide range of
business aspects, such as load growth forecasts, financial parameters,
environmental regulations and so on. Such an analysis has to be determined separately for each plant (IEA, 2000). The economic analysis to
change the technology per se, where there is an increase of both capital
cost and fuel switching,11 must be contrasted with the savings due
to lower O&M costs, the improved efficiency with the new fuel and,
indirectly, with the social and environmental benefits. Regardless the
cost-benefit analysis of the technological improvement, our argument is

Petersen et al.

37

that as soon as this generator changes to a cleaner technology, it has

an additional asset to trade: 576,000 tons of CO2 sequestered or
avoided.12
The business opportunity is not only for coal-based plants but also for
fossil fuel generators in general. Simply lowering the heat rates of these
plants will result in greater efficiency (i.e., less fuel burned per electricity produced) and lower carbon emissions. Improved maintenance (either low cost or no cost) could reduce heating rates by as much as 5%
(Interlaboratory Working Group, 1997). For a 200 MW plant working
330 days/year, this could mean yearly CO2 emissions reductions of
72,000 tons for a coal-based plant, 57,600 for an oil-based plant and
43,200 for a gas-powered plant.
With respect to increasing the generating capacity in the region,
renewables should be considered such as wind farm, biomass or small
hydropower projects, as these will be able to take advantage of CDM
and emissions reductions trading. Peas Blancas, a hydropower plant
(35.4 MW of capacity) in Costa Rica, has been operating since September, 2002. In an energy deficient region, developments of new plants or
projects are being constructed to pilot opportunities within the Clean
Development Mechanism. By avoiding the installation of a fossil fueled
generating station and implementing renewables, the plant is expected
to avoid emitting approximately 800,000 tons of CO2 (800.000 CERs13)
over a 10-year period. The projects facilitators, the Costa Rican Electricity Institute (ICE) and the Government of Holland, anticipate that
this will represent an additional income of approximately 3 million 600
thousand Euros if they were to acquire 4.5 Euros/CER on the carbon
market. Even though this amount only represents about 10% of the total
cost of the plant, it is still a significant amount and serves to send a positive signal to financiers.14
Other emissions reducing projects involving the innovation and involvement of firms from the global south remain wide open (Donnelly,
2000). They may be as unusual as providing opportunities for farmers
of the global south to change the feed of their cattle,15 or contributing
solutions for the deforestation of the Amazon forest. Estimates suggest
that the deforestation rate over the next three decades, resulting in subsequent emissions and a decrease in sequestration, will negate any reducing activities brought about by standards set in the Kyoto protocol
(Carvalho et al., 2004). In other words, organizations of the developed
countries are exploring ways to manage the impending limit on emissions though the investment in emissions reducing programs of nonAnnex B countries via the clean development mechanism. In support of

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this and as an indication of this venture trend, many governments have

established climate change offices, with some going as far as developing CDM programs. For instance, the Spanish government has pledged
200 million towards their CDM program, pushing total European
government commitment to over one billion Euros (Michaelowa,
2005). On the other side of the equation, some governments of Annex B
and non-Annex B nations have taken the initiative to assess carbon
resources and the areas for potential investments. Brazil16, Cuba17 and
India are a sampling of this growing list. Even Central and South American government support for CDMs is on the rise. As of 2003, 13 countries have established CDM offices, with many of these having
identified projects and 9 of them having approved some.18
FINAL WORDS
Because technology is constantly changing, the new paradigm for
global competitiveness requires organizations to have the ability to innovate rapidly (Porter and Van der Linde, 1995a). Many firms in developing countries do not have the resources available to compete at this
level. The paradigm of bringing environmental improvements and
competitiveness together (Hart, 1997; Porter and Van der Linde, 1995a)
through environmental technologies to create and expand market
demand, change production costs and make firms more attractive to investors and communities alike (Shrivastava, 1995) has yet to be experienced in the LAC region. Some countries of the North have sought to
establish competitive advantages on an international scale through research and development in environmental technologies. Shrivastava
(1995) has predicted that these technologies will impact the competitiveness of many industries and countries with the global south destined
to lag behind. If it were not for the advent of Kyoto and the soon-to-be
first movers of the global south, the energy industry would falter. The
entrepreneur as first mover is the prime mover in economic development. He or she pursues (actively) opportunities (Stevenson and Jarillo,
1990) in the face of uncertainty (Mises, 1949) and changes the landscape of competition. Since the innovators are the prime catalyst for the
opening of new markets, which we suggest for many of the firms
from the global south, their participation with climate change emissions
reduction mechanisms will be the opening of new market opportunities.
If the rest of the globe is searching for opportunities to invest in emissions reduction, firms in the southern region have an opportunity to

Petersen et al.

39

innovate and provide avenues for those investments and potentially

reap the benefits. These benefits include newer technologies, new and
improved capabilities, emission credit payments, global recognition,
local environmental improvements and so forth.
Because the climate change issue is an environmental initiative, we
believe that it is falsely portrayed as an investment that is not supported
by governing institutions and as competitively disadvantageous. However, at the rate that organizations and their respective countries continue to address the climate change issue, and activities continue to
unfold, opportunities for firms of the global south will be certain to
arise. Innovatorsorganizations that are able to reconcile environmental
initiatives as potential opportunitieswill be the ones that seize first
mover status and enjoy the advantage.
NOTES
1. The Framework Convention on Climate Change (FCCC) emerged in Rio and led
to the introduction of the Kyoto protocol, signed in 1997. The Kyoto protocol invited
developed nations to reduce their greenhouse gas (GHG) emissions to approximately
5% below 1990 levels over a five-year period (from 2008 to 2012). The Kyoto protocol
would come into effect if 55 countries ratified it.
2. Royal Dutch Shell and BP are reducing emissions and have participated in emissions trading. In Canada, regional projects such as PERT (pilot emissions reduction
trading) and GERT (greenhouse gas emissions reduction trading) have been piloted to
gain experience with emissions constraints. Trading floors have been established in
many countries such as the USs Cantor Fitzgerald and Australias Price Waterhouse
Coopers.
3. The Greenhouse Emissions Management Consortium (GEMCO) is a group of
Canadian electricity producers in Canada. The mandate of the consortium is to voice
the concerns of their members to ensure that policy makers understand such concerns.
Some members are: BC Hydro; Enbridge Ltd. EPCOR Utilities Inc.; PanCanadian
Pipelines Ltd. (applied); TransAlta Corporation; TransCanada Pipelines Limited.
4. Defined by Shrivastava (1995) as production equipment, methods and procedures, product designs, and product delivery mechanisms that conserve energy and
natural resources, minimize the environmental load of human activities, and protect the
natural environment. Both pollution prevention and /or pollution control strategies can
be considered as environmental technologies. The former seeks to change the process
or raw materials used to reduce emissions (e.g., energy efficiency). The latter implies
the implementation of what is known as end-of-the-pipe technologies which capture
the emissions by preventing their release into the environment [Shrivastava, 1995].
5. Some firms from the Oil and Gas industry may be an exception. Companies such
as Petrobras from Brazil, Pemex from Mexico and PDVSA from Venezuela have
developed centers of excellence for outstanding technology development [Thorp, 1998
#57].

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LATIN AMERICAN BUSINESS REVIEW

6. A total of 960,000 GWh were generated in 2000 in LAC, with hydroelectricity

making up 63%, and thermoelectricity representing 34%.
7. The UNFCCC sees the CDM as promoting sustainable development by
encouraging the investment of private firms and governments in projects in developing
countries that reduce or avoid emissions. Developed countries will receive credit
against their targets, as outlined by Kyoto, for emissions reduced by these projects. In
addition, a levy on the CDM will fund projects that will help the most vulnerable countries adapt to future climate change impacts.
8. The Marrakesh Accord, agreed upon by the Conference of the Parties, can be
found at the UNFCCC website: http://unfccc.int/cop7/documents/accords_draft.pdf
9. We are assuming that both fuels (coal and natural gas) are available for such a plant.
10. The calculations were done using U.S. average (CO2) output rate from different
energy sources (See: DOE/EPA CO2 emissions from the generation of electric power
in the US, July 2000)
11. The gas/coal price differentials are estimated between $0.72 and $ 1.18 per million of Btu (MBtu).
12. A similar analysis could be done, considering switching oil derivatives to gas.
13. Certified Emission Reductions.
14. The CERUPT 2001 (Certified Emission Reduction Unit Procurement Tender)
was a bidding process promoted by the government of the Netherlands to buy CERs
under Clean Development Mechanism (CDM). It was the first program under such a
mechanism promoted by the Netherlands.
15. TransAlta Utilities of Canada has been involved in the investment and purchase
of emissions credits since 1999. Their hallmark investment was in 2000. The firm partnered with Washington-based Global Livestock Group and provided a feed supplement to owners of Ugandan cows. The supplement helped the cows digest their food
better, and as a result they produced less flatulence. Thirty million tons of methane
credits were earned from the investment.
16. R. Lemoine and J. Allards paper Brazil Market Study: Clean Development
Mechanism for the Ministry of Foreign Affairs on behalf of SNC Lavalin, July 2001,
assesses the country of Brazil for such investment opportunities.
17. A. Curbelo, Director of Ministry of Science, Technology and Environment has
compiled a list of opportunities in Cuba entitled Climate Change Projects, Opportunities in Cuba. The report was prepared for the government of Canada.
18. The State of Development of National CDM Offices in Central and South America. An institutional evaluation by the Andean Center for Economics in the Environment for The Department of Foreign Affairs and International Trade, Climate Change
and Energy Division, Canada.

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Received: 04/10/2004
Revised: 15/07/2005
Accepted: 22/07/2005