With stringent new regulations on utilities, coal is again the energy industry's unwanted child. That's why companies like American Electric Power (NYSE:AEP) have been shifting toward natural gas. However, don't let the headlines fool you -- companies as far-reaching as Procter & Gamble (NYSE:PG) also have carbon issues to deal with.
The rules are changing
The U.S. Environmental Protection Agency just came out with new rules about carbon dioxide emissions from power plants. There's no denying it -- coal will have a tough time living up to the standards. However, setting the "start" date for the regulation at 2005 is a big help because it allows nine years' worth of the natural gas shift to count toward the improvement.
That's big because historically low natural gas prices have led more and more utilities to increase their use of cleaner burning natural gas. For example, between 2005 and 2010, AEP's natural gas capacity increased by roughly a third while coal remained static. Between 2010 and 2016, however, coal capacity is set to fall by about 30% and natural gas capacity increase by another 30 percentage points or so.
But here's the really good news, AEP estimates that by 2016 it's carbon dioxide emissions will have declined by roughly 25% since 2005. The company is well on its way to meeting the new regulations. That's true even though coal made up 75% of AEP's generation last year. And, more important, the plans leading up to these changes were in place before the new regs were announced. That means new spending won't be too onerous. Make no mistake, however, AEP will have to keep doing more to improve -- particularly since it still relies so heavily on coal.
No so much in the headlines
Utilities are the big carbon dioxide news because of government regulations. But they aren't the only emitters of the greenhouse gas. For example, while power companies like AEP are the largest emitters of CO2, they are responsible for "just" 40% of domestic emissions. Autos come in a very close second. And the rest comes from industrial, residential, and commercial sectors, roughly in that order.
That's why P&G has a problem on its hands. For example, the consumer products giant has been dropped from the Dow Jones Sustainability Index. And while the company's efforts to reduce greenhouse gas emissions have resulted in a nearly 11% decline since 2008, that's roughly 20% below the reduction achieved by key competitor Kimberly-Clark (NYSE:KMB).
Part of the issue could be that P&G lags well behind in its efforts to reduce electricity use. Kimberly-Clark, for example, has cut its power consumption by nearly 20% since 2008. Procter & Gamble cut power use by just under 5%. Not only is P&G losing out on cost savings that could be achieved by such simple things as switching to LED light bulbs, but it's also risking a public relations problem.
Image is everything
Everyone knows power companies are an issue when it comes to pollution. It's sort of a necessary evil, though we have worked hard over the years to help (force?) the industry to clean up its act. And, whether we like their pollution profile or not, we have to use the electricity companies like AEP generate. The government has strict regulatory control over utilities because they operate as regional monopolies.
What we don't have to do is buy P&G products. There are plenty of other options out there, and while some brands have massive market share, none have achieved monopoly status. For example, one of Kimberly-Clark's leading brands is Huggies diapers. The brand and its many variants compete directly with P&G's Pampers and Luvs diaper brands.
Although P&G claims that Pampers is the world's top selling diaper brand, if you've ever had a child you are well aware of Kimberly-Clark's Huggies. And now that more and more people are paying attention to the environment, P&G falling behind competitors like Kimberly-Clark on the green front could help shift buying habits. This issue is, indeed, about more than just utilities.