Assigning firm-level GHGE reductions based on national goals - Mathematical model & empirical evidence
Graphical abstract
We present a novel framework which enables the setting, measurement and tracking of the emissions performance of every commercial entity based on a single metric. We further present empirical evidence from the automotive industry to illustrate how the model helps to readily identify the low versus high performers. The model reveals one car company, i.e. BMW, that stands out as the industry benchmark by already exceeding the performance required by the 2025 US emissions target. The model proves successful in achieving the objectives of being: sciencebased, goal-driven, equitable, comparable and actionable, and as such can be readily used to accurately compare competitors from the same industry and provide the basis of a more equitable, performance-based carbon tax market.
Introduction
In September 2016, the Scripps Institutions of Oceanography reported that carbon dioxide crossed the significant and symbolic threshold of 400 ppm (parts per million) for the first time in human history. Based on paleoclimatic evidence, the last time CO2 levels reached 400 ppm humans didn't yet exist. Indeed, a 2009 report from the Nature Geoscience journal found evidence of levels of 365–415 ppm going back to 4.5 million years ago (Pagani et al., 2009). To bring things into perspective, the current levels of 400 ppm are about 120 ppm higher than the pre-industrial levels in the later 1800s, or more than a third higher (Pagani et al., 2009). With three quarters of the world's mega-cities, representing 80% of the world's population, located by the sea (SaveTheSea, 2017), the disastrous consequences of extreme weather events due to the greenhouse effect are simply unfathomable. It is hence difficult to overstate the urgency of reducing greenhouse emissions on a global scale in a way that is predictable and effective. Yet, even after the historic Paris Agreement within the United Nations Framework Convention on Climate Change (UNFCCC), where aggressive greenhouse gases emission mitigation targets were set (The Paris Agreement, 2016), there is still no clear strategy or game plan for how to reach those aggressive reduction targets. In fact, recent research suggests that the US is on pace to miss its 2025 target in Paris climate deal by a range of 551 to 1800 MMt-CO2e (million metric tons of CO2 equivalent), with resulting net changes in GHGE ranging from 0.6% above to 11.8% below the 2005 level (Greenblatt and Wei, 2016); a far cry from the promised 28% reduction even in the best case scenario. Similarly, Environment Canada recently announced that it projects to miss its 2030 GHGE target by about 30% resulting in essentially flat emissions of about 741 MMt-CO2e, instead of the ambitious goal of 523 MMt-CO2e promised at the landmark Paris climate summit (ECCA, 2017).
The US framework for GHGE reduction revolves around the Obama Administration's Clean Power Plan, which includes passed and proposed legislation, as well as potential policy or voluntary measures to support the announced reduction target. These wide reaching measures cover electricity and building codes, fertilizer management, appliance standards, heavy-duty vehicles, oil and gas CH4 leaks, manure management and landfills CH4 emissions (INDC, 2015). Although the US Environmental Protection Agency (EPA) has included carbon pricing, in the form of cap-and-trade, as an option for implementation plans, it has left it up to the individual states to decide to what extent pricing will be used to achieve the Clean Power Plan goals (Lawson, 2016). On the other hand, Environment Canada has made carbon pricing the first and most important pillar of its four-pillar framework to achieve its 30% target reduction of GHGE by 2030 (ECCA, 2017). For both countries however, the unfortunate reality is that it has become exceedingly clear that neither set of policies appear to be enough to reach those self-assigned goals (Greenblatt and Wei, 2016, ECCA, 2017).
Besides the emergence and implementation of detailed government policies to curb GHGE and mitigate climate change, there has been an exponential growth in voluntary reporting in the last fifteen years. Chief among the reporting frameworks is the Global Reporting Initiative (GRI), which has seen its member organizations grow to more than 10,630 organization in 2016 in about 15 years since inception (SDD, 2017). Although sustainability reporting was initially believed to help its members become more sustainable (Initiative, 2014), the general consensus among the literature is that reporting is clearly insufficient in driving meaningful reductions (Fonseca et al., 2012, Ioannou and Serafeim, 2011, Isaksson and Steimle, 2009, Eccles et al., 2014). Higgins and Coffey suggest that while current reporting allows stakeholders to create a dialogue with companies (Higgins and Cofey, 2016), they have recommended substantial changes to the current structure of sustainability reporting. In addition, Isaksson and Steimle firmly state that the GRI guidelines fail to ensure that a report answers the questions of how sustainable a company is or how quickly it is approaching sustainability (Isaksson and Steimle, 2009). Even within the latest G4 framework, individual companies dispose of a great deal of latitude on what and how to report, and how to illustrate it, with varying degrees of opacity and little to no repercussion for failing to perform against emission targets or for that matter any other sustainability metric. A recent paper by Belkhir et al. illustrates how current sustainability practices can actually be very misleading (Belkhir et al., 2017). Using rigorous statistical analysis, they show in particular that there is no significant difference in emissions between companies strictly complying with the highest standards of the GRI and those that don't subscribe to GRI at all. Their findings even suggest that in some cases, the current reporting methods might be rewarding of the least sustainable companies and painting in poor light those that are both succeeding as a business and as a sustainable entity. Indeed, a thriving young company that has developed a low-carbon innovative technology might see its emissions grow extremely rapidly in its growing stage, and hence be severely penalized by undiscriminating carbon pricing. Conversely, a highly emitting company may see its emissions drop not because of any emissions reduction actions, but simply because of loss of market share. Yet, in the eyes of policy measures as they stand today, that company could benefit from the “hype” of emissions reduction.
This state of affairs hence begs the key question: How is setting emissions targets at a country level going to translate into a commensurate target at the firm or entity level in a way that is fair and deterministic? If we are to reach the ambitious goals set by 195 countries in Paris (The Paris Agreement, 2016), we need a measurement and reporting system that is (i) science-based, (ii) goal-driven, (iii) equitable, (iv) comparable and (v) actionable. Only then will we be able to develop a game-plan that will allow us to reach the reduction targets that might spare our world the weather catastrophes that are otherwise certain to happen.
In this paper we outline the theoretical framework that provides for the first time, to our knowledge, a mathematically rigorous method that meets those five above conditions and allows us to measure and manage greenhouse gas emissions (GHGE) from the national level down to the firm or entity level, and closes the loop back to the national set targets. A key contribution of this paper is the demonstration that a standard definition of emission intensities at both the firm and industry sector levels, and the formulation of a relative emission intensity ratio, provides a single standard metric that enables a fair and objective assessment of the performance of both the sector and the individual firms belonging to that sector relative to the target reductions expected from that sector. Departing from the GRI framework, which leaves the emission intensities to be defined at the discretion of the individual entities, we propose in this paper that the only way of cascading emission reduction targets from the national to the firm level, is to define emission intensity relative to the operating revenues generated by that firm, in such a way that the firm is assessed for changes in emissions that are commensurate to the firm's economic contribution. We then proceed to show that once defined that way, this framework allows for proper comparison between competitors within an industry sector, and allows for equitable allocation of emission budgets, as well as a fair approach to encouraging innovators and discouraging “green-washers” and polluters, hence providing a fair and effective path for performance-based policies, including a more sensible carbon-pricing model.
Section snippets
Conceptual development
For the theoretical part of our paper, we have started by assuming that the total GHGE of any given country is well known and measured in metric tonnes of CO2 equivalent (Mt-CO2e). We restrict our emissions to Scope 1 and Scope 2 only. Scope 3 emissions were excluded to avoid double-counting. Since we consider in our model direct (scope 1) and indirect emissions (scope 2) from electricity use, and consider the GHGE by end-use sector, effectively attributing the GHGE from electricity production
Theoretical framework
This section lays the mathematical foundation of our proposed framework for measurement and reporting of emissions at the national, industry sector, and entity levels. Let E(n) represent the carbon budget in the nth year and Δ(n) be the reduction in emissions that is necessary over n years to reach that goal. Also, let η, represent the portion of E(n) produced by the integrality of all the commercial sectors combined. Then for all of the j entities within each of the i sectors, which we shall
Results
In order to illustrate the theoretical framework discussed in this paper, we examined the auto industry over a two-year period from 2014 to 2015. There were ten major auto companies that reported scope 1 and scope 2 CO2 in those two years. Fig. 2 shows the change in emissions for those ten auto companies. At first blush, GM and Yamaha appear to lead with 10% reduction in emissions, followed by Nissan and Daimler with reductions of almost 5% and Ford with a reduction of 2.5%. On the other hand,
Discussion
In the first part of our empirical analysis, we have shown how the application of our theoretical model to the automotive industry using real data demonstrates how a single quantitative metric, namely the relative emission intensity, defined as the ratio of the emission intensity of the firm over the overall sector emission intensity, can be used not only to assess unequivocally the firm's performance relative to its peers, but also, and perhaps more importantly, to assess the performance of
Conclusion
In conclusion, we have proposed a novel science-based, goal-driven, equitable, comparable and actionable framework for measuring and reporting emissions that enables the cascading of GHGE target reduction from the national level down to the firm level, capturing accurately the market dynamics and competitive pressures within an industry, and allowing a year-over-year performance tracking against targets at the industry sector and firm levels. A key contribution of our model is the introduction
Acknowledgements
We thank Dr. Mo Elbestawi for his ongoing support of this research as well as McMaster University for the research grant No. 5-55050 without which this paper would not have been possible. We further thank ET Index Research for making their data set available to us on very favorable terms.
References (23)
- et al.
Improving how sustainability reports drive change: a critical discourse analysis
J. Clean. Prod.
(2016) Greenhouse gas emissions per unit of value added (GEVA)? a corporate guide to voluntary climate action
Energy Policy
(2012)The Worldwide Automotive Growth Is Slowing Down
(2015)- et al.
Does GRI reporting impact environmental sustainability? a cross-industry analysis of CO2 emissions performance between GRI-reporting and non-reporting companies
Manag. Environ. Qual. Int. J.
(2017) - et al.
Inventory of u.s. Greenhouse Gas Emissions and Sinks: 1990-2015
(2017) Guidance for Companies Reporting on Climate Change on Behalf of Investors & Supply Chain Members 2016, Carbon Disclosure Project
(2016)On Clean Growth and Climate Change - Canada's Plan to Address Climate Change and Grow the Economy Mitigation Policies of the United States
(2017)- et al.
The impact of corporate sustainability on organizational processes and performance
Manag. Sci.
(2014) - et al.
Sustainability reporting among mining corporations: a constructive critique of the GRI approach
J. Clean. Prod.
(2012) - Global Reporting Initiativr, GRI G4 Guidelines and ISO 26000: 2010 How to Use the GRI G4 Guidelines and ISO 26000 in...
Assessment of the climate commitments and additional mitigation policies of the United States
Nat. Clim. Change
Cited by (8)
Comparison of production decision-making models under carbon tax and carbon rights trading
2022, Journal of Cleaner ProductionCitation Excerpt :Net zero emissions have become the common goal of every country and every industry, and the tire industry is one of the industries that needs to be accelerated to reduce carbon emissions (Den Elzen et al., 2019). In fact, the country sets emission reduction targets and then allocates them to industry or company-level emission reduction targets (Jackson and Belkhir, 2018; Zhang et al., 2017; Giwa, S.O. et al., 2017). The emission reduction approach can be started by energy-related carbon emissions reduction (Lin and Ahmad, 2017; Giwa, S. et al., 2017), including renewable energy and energy efficiency (Giwa et al., 2017), in terms of renewable energy, including solar energy (Abrell et al., 2019; Prăvălie et al., 2019), wind, etc., also hydrogen (Parra et al., 2019), low-carbon energy (Fernández-Dacosta et al., 2019; Giwa et al., 2019b; Nwaokocha et al., 2021), or even the development of a zero carbon energy system.
Carbon footprint of the global pharmaceutical industry and relative impact of its major players
2019, Journal of Cleaner ProductionCitation Excerpt :In conclusion, we have used the B&J model, which is a science-based, goal-driven, equitable, comparable and actionable framework for assessing and reporting emissions of the pharmaceutical industry. Unexpectedly, we found that the Pharma industry, on average, is a higher intensity emitter than the automotive industry which was analyzed by Jackson and Belkhir using the same model and the same methodology (Jackson and Belkhir, 2018). Also, we have found a much greater variability among the Pharma industry than the automotive industry.
Unpacking carbon accounting numbers: A study of the commensurability and comparability of corporate greenhouse gas emission disclosures
2019, Journal of Cleaner ProductionCitation Excerpt :This adds to current discussions on the metrics and the difficulty to find an integrated approach to measure GHG emissions (Côté and Liu, 2016). If different models are mathematically explored (Jackson and Belkhir, 2018) or compared in the literature (Akanni Olanrewaju and Mbohwa, 2017), we provide evidence that estimation models should take facility characteristics into account to produce highly commensurable GHG emissions data. This suggests that the current identified difficulties in defining environmental reporting quality (Qian et al., 2018) could be overcome by moving the analysis to the facility level.
Development in Implementation of Carbon Tax: A Bibliographic Study
2023, E3S Web of Conferences