To decarbonize, focus on sectors rather than companies

Corporate emissions accounting is implicitly based on a life-cycle perspective borrowed from product life-cycle assessment. The diagram below from the GHG Protocol’s value chain accounting standard illustrates how a single product’s life-cycle emissions make up a sliver of a company’s emissions across all scopes (ignoring for now that the company-level emissions inventory is for a year while the product-level inventory is not time-bound). This framework is great for attributing responsibility for emissions to the company that sits in the middle of the value chain and makes the final products that consumers use. But attribution doesn’t get us to decarbonization as we have argued previously.

Source: https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf

The company-centric life-cycle perspective is ill-suited for decarbonization because so much of the emission reductions must happen outside of a company’s direct control. Focusing instead on key sectors in the economy can greatly reduce the complexity and simplify the decarbonization challenge. Climate policies and incentives are, in fact, increasingly aligned with a sector-centric approach.

Where the company-centric approach hits a brick wall with scope 3 emissions

It is well-known that scope 3 emissions from the value chain can easily account for 80-90% of the total emissions for companies that produce physical products, so corporate emission reductions often turn specifically into a scope 3 emission reduction problem. There are fundamental reasons why scope 3 reductions have bedeviled most companies to date:

• Use of secondary data: Companies generally use secondary data to model purchased materials in their emissions inventories because primary data from suppliers is hard to come by. This use of industry-average data makes it difficult to choose between specific suppliers with any confidence that scope 3 emissions would decline as a result. Moreover, simply switching between suppliers is unlikely to lead to immediate and additional emission reductions.
• Disruptive changes to suppliers: Can companies collaborate with existing suppliers to reduce upstream emissions? Actual experience with consumer product companies of all sizes suggests that it is challenging to identify the exact sources and production methods associated with most of the raw materials and ingredients purchased by these companies. Assuming a company could overcome the information challenges, actual reductions in upstream scope 3 emissions can only be achieved by convincing suppliers (and the suppliers’ suppliers recursively) to implement vast and disruptive changes to how they run their companies.
• Cost of removing carbon from value chains: The final barrier for most companies embarking on scope 3 decarbonization is cost. Emission reductions, like anything else in business, are not free and will require investment. Using a modest price of $15 per tonne of CO2e as a floor for the cost of actually removing carbon from value chains, decarbonization could cost upwards of 0.5% to 3% of gross revenue for companies in consumer sectors such as food, clothing, and personal care products.

Scope 1 and 2 reductions are not that easy either

Cutting scope 1 emissions would seem much simpler by comparison because companies have complete control over this, but reductions require electrification in most cases which in turn comes down to whether capital costs can be justified. If electrification of building heating, process heating, and company-owned transport can be undertaken then reductions in scope 1 emissions will be accompanied by increases in scope 2 emissions from electricity purchase.

Reducing scope 2 emissions brings its own set of difficulties. Purchasing unbundled renewable energy certificates (RECs) is the easiest approach, but will likely do nothing in reality because almost all of these RECs are non-additional. Power purchase agreements (PPAs) for renewable electricity are much more likely to produce additional emission reductions, but purchasers will need to be able to absorb the complexity and risks associated with PPAs. This rules out small and medium-sized companies from participating in renewable electricity unless they have access to aggregated PPAs. There is also a clear need for matching hourly electricity consumption with clean electricity production (known as 24x7 carbon-free electricity) which adds another dimension to the difficulty of cutting scope 2 emissions for real.

Comparing the company-centric and sector-centric models

Instead of every company looking at upstream suppliers and downstream logistics to rope into decarbonization efforts independent of what other companies are doing, what if we focused on critical sectors that serve a large number of companies in the economy? Sectors, in other words, that many value chains must pass through in order for the economy to function. 

The diagram below illustrates a set of critical economic sectors, with the size of the circles roughly representing sector-level emissions. Even though there are economic transactions between sectors, sector-centric emission reductions would happen within each sector independent of its interactions with other sectors.

Compare this to the next diagram which illustrates just one company with a relatively simple value chain. In a company-centric approach, the company at the center of this value chain will not only need to account for its share of the emissions from all the sectors it uses (both upstream and downstream) but also somehow implement a decarbonization strategy that involves many of those sectors.

Now imagine millions of such companies, all trying to account for their value chain emissions (which mostly come from the same set of critical sectors) and looking to decarbonize on their own. The complexity and intractability of this undertaking would be off the charts. This is exactly where corporate emissions accounting and reduction targets are currently headed.

Focusing on sector-level decarbonization

A sector-centric approach would funnel money and resources into specific sectors that generate most of the emissions in the economy, helping to develop common technologies and practices that could be used widely by all companies within those sectors and radically reducing the cost of decarbonization across the economy.

Using the US national emissions inventory as a guide, there are some obvious sectors at the center of the economy that should be (and increasingly are) the focal points for decarbonization:

• Electric power generation is responsible for 25% of US emissions. With renewables already the cheapest form of power and battery technologies ramping up fast, broad decarbonization of the grid can happen simply by focusing on the power sector and directing investments to it. In the US, investments from the Inflation Reduction Act (IRA) are expected to trigger a 49-83% reduction in power sector CO2 emissions by 2030 (relative to 2005). None of this is predicated on every large/public company calculating its scope 2 emissions and then attempting to “purchase” renewable electricity.
• Transportation produces 29% of US emissions and the bulk of this is in the form of energy-related CO2 emissions. The IRA and the Bipartisan Infrastructure Law together are spurring electrification of transport which will result in 19-24% lower CO2 from US transport by 2030. This is not dependent on companies across the economy explicitly accounting for and attempting to reduce emissions from their use of goods and passenger transport.
• Agriculture is responsible for 10% of US emissions. Just under half of this is N2O from agricultural soils, and most of the rest is CH4 and N2O produced by raising farm animals. The IRA includes a modest amount of funding for climate-smart agriculture, which aims to develop practices like cover cropping and conservation tillage (although more research is needed to determine the effect on N2O emissions), but ignores emissions from meat and dairy production. Clearly, additional funding and mandates are needed to decarbonize agriculture. This, again, would be a sector-level initiative and not contingent on company-level emissions accounting.
• Steel and cement production are among the other critical sectors that the economy depends on. Each of these generates less than 1% of US national emissions but is likely higher globally, with emissions coming from both the fossil-fuel-driven high process temperatures and direct CO2. Both of these sectors are expected to receive government funding and mandates if the Biden administration returns for a second term. The built environment has historically accumulated a huge amount of embodied carbon from steel and cement, but all future construction can benefit directly from decarbonization in these two upstream sectors.

When critical sectors like these get on a clear decarbonization trajectory with adequate funding and mandates, all companies and products using those sectors also decarbonize without additional effort. The sector-centric approach would fix the emissions problem where the emissions actually occur. Regardless of how we choose to attribute emissions, the only places where we can cut emissions are at the sources of those emissions.

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