Haute Lumière

Commerce · VII.02 · MMXXVI · daylight

La Bourse  /  Volume VII  /  Nº VII.02  /  Workbook — the Gainshare employee

A timber room with a low fire and floor cushions, a wall of glass framing snow-capped mountains.
Plate VII.02 · Workbook — the Gainshare employeeThe Thermometer on the Balance Sheet.Climate economics is not the study of a catastrophe. It is the study of a quantity that has a physical unit and no price, and of what happens to a balance sheet when somebody finally writes one in.

WORKBOOK — THE LUMINOUS GAINSHARE EMPLOYEE

Chapter VII.02 · Climate as an Economic System

For the person working inside a shared-upside scheme. Carbon is about to become one of the largest gainshare pools in your firm, and almost nobody inside a scheme yet knows how to claim from it without over-claiming. This workbook is how the mechanism reads from the inside: what to measure, what to claim, how the ledger works, and what to ask for.

WHAT A CARBON GAINSHARE ACTUALLY IS

A gainshare pays you a share of a gain your work produced. Everything therefore depends on how the gain is defined, and carbon has three definitions of gain in the same building, which is why claims go wrong.

  1  CASH SAVED          fuel, power, materials not bought.
                         Verifiable in the ledger. Uncontested.

  2  COMPLIANCE COST AVOIDED   allowances not surrendered, tax not paid.
                         Verifiable against a market price. Mildly contested.

  3  SHADOW VALUE        tonnes avoided x the firm's internal price.
                         Not cash. Heavily contested, and the largest number.

For the worked firm in the chapter — 250,000 tonnes of scope 1, 60 percent covered at $70.4 — the cash carbon cost is $10.56 million and the cost at a $190 shadow price is $47.50 million. The $36.94 million difference is real exposure and it is not cash.

Here is the rule that will protect every claim you ever make. Claim categories one and two in cash. Report category three separately, by name, as shadow value. A gainshare claim that quietly mixes the three will be reduced by finance the first time it is examined, and the reduction will fall on your credibility rather than on the arithmetic.

PART ONE — DISCOVERY

Days 1–30: find where the gain actually comes from

Exercise 1.1 — Locate yourself on the curve (half a day)

Your firm's abatement curve is a list of tranches ordered by cost per tonne. In the worked firm, 45,000 tonnes clear below the market price of $70.4 and 115,000 clear below the shadow price of $190, so an incremental tranche of 70,000 tonnes a year sits between the two, at an average cost of $130.

Find which tranche your work sits in. Three answers, three different claims:

Exercise 1.2 — Find the gains nobody has counted (half a day)

Three places where carbon gains sit uncounted in almost every firm:

  1. Avoided replacement. Equipment kept running rather than replaced. The carbon gain is embodied and invisible in the energy ledger.
  2. Process changes with an energy side-effect. Somebody changed a schedule, a temperature, a route. Nobody attributed the energy fall.
  3. Refused purchases. The cheapest tonne is one never bought, and there is no invoice to point at.

Each of these needs a counterfactual to be claimable. Start building it now, before the gain shows up, because a baseline constructed afterwards can be argued away by anybody who wishes to.

PART TWO — THE ARITHMETIC

Days 31–45: compute what you are owed

Exercise 2.1 — Build your claim in three columns (one day)

TonnesPrice usedValueEvidence
Cash savedinvoiceLedger line
Compliance avoided$70.4Market price, dated
Shadow value$190Price memo, board-minuted

Fill all three. Total only the first two. Present the third beside the total, never inside it.

For the chapter's incremental tranche, the shadow value is 70,000 × (190 − 130) = $4.20 million a year, against an abatement cost of $9.10 million. Notice that the tranche is cash-negative and shadow-positive. A gainshare written only on cash will pay nothing for that work, which is precisely why the definition of the pool is the thing to negotiate first.

Exercise 2.2 — Know what the price is worth, and why it moves (two hours)

Your shadow value is a product of your tonnes and a number somebody chose. Know the number's behaviour before you depend on it.

The EPA's estimates are $120 at a 2.5 percent near-term rate, $190 at 2.0, $340 at 1.5 — 2.83× across one percentage point, with half-point steps of 1.58× and 1.79×. Inside Nordhaus's own model the same lever gives 6.52× across 2.5 points, or 2.12× per point.

So a change to one parameter you do not control can cut your shadow value in half or double it. Two protections, and ask for both: the price is fixed for the scheme year, and any change is applied prospectively. A gainshare whose denominator can be revised mid-year is not a gainshare; it is a discretionary bonus wearing a formula.

Exercise 2.3 — Stress your own claim before anyone else does (two hours)

Three questions finance will ask. Have the answers written.

  1. Would this have happened anyway? The additionality question, and it is the same one that sank the crediting market: 85 percent of CDM projects at low likelihood of additionality, 2 percent at high; 6 percent of credits from 18 forest projects genuinely additional. If your claim cannot answer it, it is the same kind of claim.
  2. What is the baseline and when was it set? Before the intervention, signed, or it is not a baseline.
  3. Is the price board-minuted? If not, your shadow value has no denominator and your claim is an opinion.

Exercise 2.4 — A worked claim, end to end (one day)

Take a share of the chapter's tranche and write the claim as you would submit it. Suppose your team is responsible for 10,000 of the 70,000 tonnes a year in the incremental tranche, at the tranche's average cost of $130.

  tonnes, verified                         10,000 t / yr
  cash saved, at the market price          10,000 x 70.4   =  $0.70 m
  cost of the abatement                    10,000 x 130    =  $1.30 m
  net cash                                                    -$0.60 m
  shadow value, at 190                     10,000 x 190    =  $1.90 m
  net at the shadow price                                     +$0.60 m

Read the two net lines. The identical work is a loss of $0.60 million on the market price and a gain of $0.60 million at the shadow price, and the difference is entirely a number the board chose. This is not a trick and it is not accounting sleight of hand — it is what a shadow price is for: it makes visible a cost the firm is already bearing and not recording.

Now write the three sentences you would put at the top of the claim. The first states the verified tonnes and the method. The second states the cash position honestly, including the negative. The third states the shadow value separately with the price, its basis and its minute date. A claim that leads with the negative it does not have to disclose is the one that gets believed about the number it does.

Exercise 2.5 — Know your boundary (two hours)

Ask which tonnes count as yours. Scope 1 is what you burn; scope 2 is the power you buy; scope 3 is everything upstream and downstream, and it is usually the largest and the least measurable. Most gainshare schemes are silent on scope 3, which means work on supplier emissions produces gains that belong to nobody.

Write down which scopes your pool covers. If scope 3 is excluded, say what it would take to include one category of it — the one where your firm has the most influence and the cleanest data. That is a scheme improvement you can propose with no capital, and it is the kind of proposal that gets a person known.

PART THREE — DESIGN

Days 46–70: make the uncounted countable

Exercise 3.1 — Ask for the pool to be defined in writing (one meeting)

The five terms that decide what you are paid. Ask for all five, in one document.

Exercise 3.2 — Build the ledger you would want a stranger to audit (one week)

One row per intervention. Baseline, method, period, tonnes, each of the three prices, the three values, the verifier, the date. Nothing in it should require your memory.

The reason is structural. Gainshare disputes are almost never about whether the work happened. They are about whether the gain can be attributed a year later, when the person who ran the baseline has moved. A ledger is what turns your good year into your record.

Exercise 3.3 — Refuse the offset shortcut, in writing (one hour)

At some point someone will propose meeting the target with purchased credits instead of the tranche you are working on, because credits are cheaper and immediate. It will look like a win for the scheme and it is not.

The record: 13.72 million of the 14.6 million tonnes of forest credits already used to offset represented reductions that did not occur. And an offset route removes the real abatement from the pool — your pool — while leaving the firm's exposure exactly where it was.

Put the one line in the scheme document: offsets may fund abatement outside our boundary; they may not discharge a tonne inside it.

PART FOUR — DESTINY AND DELIGHT

Days 71–90: make it hold

Exercise 4.1 — Get one number into the standing pack. Tonnes abated and their three values, monthly, beside the operating figures. Anything reviewed monthly persists; anything reviewed by exception does not.

Exercise 4.2 — Recruit the second owner — from finance, not from sustainability. The person who can defend the arithmetic when you are not in the room is worth more than the person who agrees with the goal. Recruit them by giving them credit for the first verified tranche.

Exercise 4.3 — Teach the three definitions to your team. The distinction between cash saved, compliance avoided and shadow value is the single piece of knowledge that separates a claim that survives review from one that does not, and it takes twenty minutes to teach.

And the delight. There is a specific pleasure in watching a number you built get used by somebody who did not build it, for their own purposes, without attribution. That is the moment your ledger stops being your claim and becomes the firm's infrastructure — and it is worth more to you, over a career, than the payment attached to any single tranche.

KNOW YOUR SCHEME — A CHECKLIST

Answer all eleven. Each unanswered one is a place where a gain you produced can disappear between the work and the payment.

  1. Is the pool cash-only, or does it include compliance cost avoided?
  2. Does shadow value count, and at what weight?
  3. What is the price, and is it board-minuted with a date?
  4. What is the escalator, and is it real or nominal?
  5. Is the price fixed for the scheme year?
  6. Is my share of the gross gain or of the gain net of abatement capital?
  7. Over how many years is a gain paid?
  8. Who verifies, by what method, over what period?
  9. Was the baseline signed before the intervention?
  10. Are purchased credits eligible to discharge a tonne? (The answer should be no, in writing.)
  11. What happens to my claim if the person who approved the baseline leaves?

THE CONVERSATION, SCRIPTED

You: "I want to agree how carbon gains enter the pool before I start the tranche, not after."

Them: "We pay on cash savings."

You: "Then the work that is cash-negative and shadow-positive will not get done, and that is most of what is left. In the firm's own worked case, 70,000 tonnes a year sit between the market price of $70.4 and a shadow price of $190, costing $9.10 million and releasing $4.20 million of shadow value. If the pool is cash-only, nobody in this building has a reason to touch that tranche."

Them: "Shadow value is not real money."

You: "Agreed, and I will never report it inside a cash total. It is exposure — $36.94 million a year against $10.56 million of cash cost, 30.8 percent of EBITDA against 8.8 percent. I am asking for a defined weight on it, a fixed price for the scheme year, and prospective changes only. If the answer is that the firm does not want that tranche abated, that is a decision I can work with. I would like it made deliberately."

APPRECIATIVE QUESTIONS FOR YOUR TEAM

  1. When has our work produced a gain that nobody counted, and what would it have taken to count it?
  2. Which of our interventions has the cleanest baseline, and who built it?
  3. If shadow value entered our pool at a defined weight, what would we start working on next week that we currently cannot justify?
  4. Where does our tranche sit on the firm's curve, and what would move it below the line?
  5. Who in finance already understands this arithmetic, and how do we make them the second owner?
  6. What would we want a stranger auditing our ledger in three years to be able to see without asking us anything?