In a net-zero carbon world, the low-carbon solution wins. With this in mind, the remaining years of this decade will be defined by tackling value chain emissions. These Scope 3 emissions often are seen as the third rail of climate policy.
Right now, the corporate gold standard is net zero well before 2050, and companies at the net-zero forefront are saying that they want to halve their Scope 1, 2 and 3 emissions by 2030.
“Scope 3 is the hard one… You can’t get ahold of the data from your suppliers sometimes because they need to go to their suppliers to get the data, and they need to go to their suppliers… We have these very long and complex global value chains, so even just wrapping your head around where to start is hard,” said Rasmus Valanko, managing director for systems transformation at We Mean Business, a global nonprofit coalition that works with businesses to take action on climate change.
Across all industrial sectors, new business guides for procurement are needed in order to get a better handle on decarbonization priorities, Valanko said in late May during a session at VERGE Electrify. Companies are struggling with questions such as, “Is it better to weight greenhouse gas emissions in bids by 10 percent or 20 percent? What kind of difference does that make? Or should a company say that, if [a supplier] doesn’t achieve a certain emission threshold, [it] can’t bid for a contract?” he said.
There is still a lot of scope to electrify industrial companies’ process emissions, and using more electricity from renewable sources can be part of the solution, according to the panelists.
However, a big challenge is often that few companies have done this before or they have done it for a different process or at a different site or with a different set-up, Valanko said.
Because industrial companies recognize it will be cheaper to run processes on electricity by 2030, many are starting to make their first investments in demonstration plants and technology to electrify.
Because industrial companies recognize it will be cheaper to run processes on electricity by 2030, many are starting to make their first investments in demonstration plants and technology to electrify their industrial processes, he added.
For their part, power companies are exploring ways to build out the renewable energy system to meet the coming surge in industrial electricity demand. But there are a lot of industrial operations where commercially available solutions for decarbonizing do not yet exist.
Charting a course to 2050
The good news is that the entire ecosystem of stakeholders is ready to engage, said Cate Hight, chief operating officer of the Mission Possible Partnership and a principal at RMI. Additionally, customers are starting to say, “Well, we are actually willing to pay a little more [for the decarbonized version],” Valanko added. As recently as two years ago, this was not the case.
“That’s also a recognition that the margins and the revenue per ton of CO2 emitted are much higher at the end of the value chains and downstream, so the retailer is making much more money per ton of CO2 that they are emitting compared to the upstream producer,” Valanko said. “So, the conversation that is happening now is — how can we more equitably share the margin as it moves through the value chain.”
According to Valanko and Hight, the industry-level supply chain collaboration going on right now is particularly promising.
This type of dialogue is vital because it helps create the roadmap for what industrial transformation in hard-to-abate sectors can look like, said Hight, whose organization, the Mission Possible Partnership, brings together more than 400 companies, along with their customers, suppliers, bankers, shareholders and regulators, to forge net-zero pathways and the actions necessary to achieve them.
An industry-backed roadmap that goes out to 2050 can provide stakeholders in an ecosystem something to pin their actions to, she said. The process starts with an industry getting together and sending a signal about it wants to buy in the future, Valanko added.
The second step is to put that on paper as a requirement that can be ratcheted up over time, and then have conversations with suppliers to open up the challenge to them, he said. “[That involves] saying — this is the problem that I am trying to fix. What solutions do you have already? Which ones are you working on? And which ones could we work on together?”
An industry-supported roadmap also can help the finance community understand what sorts of investments it needs to make, and it can help governments develop supportive policy, Hight said.
The policy levers
Technological breakthroughs that can accelerate companies’ ability to adopt new ways of doing things and leapfrogging forward certainly will be part of the industrial companies’ Scope 3 decarbonization efforts, but in the meantime, some governments are trying to move industrial decarbonization forward.
The European Union, for example, is exploring a carbon border adjustment mechanism that would place a carbon price on imports from less climate-ambitious countries. “[Because of this], companies are starting to think, ‘Maybe I can’t rely on that company that has higher emissions but a lower price if I am going to have to be buying this in the future,'” Valanko said.
There is a growing recognition that the downstream companies will have to pay for this, he added. These companies’ net-zero commitments mean they might have to start putting net-zero-aligned contracts into place, he explained. Another strategy would be to try to snap up some early innovators because supply isn’t as big as the demand could potentially balloon into, Valanko said.
When it comes to policy levers, “one cannot underestimate the role” of government procurement, Hight pointed out. Governments are the biggest buyers of commodities in the world and, as such, they send powerful demand signals.
“Think of the demand signals that the U.S. government alone could send by saying that all of the fleets that it purchases have to be made with green steel or that all of the bridges that it builds have to be built with green cement,” she said. A procurement pivot like this is likely within the next four years, starting with Europe, Hight added.
Because policymakers tend to set rules for the things that they believe are achievable, companies need to show policymakers that achievable solutions exist, Valanko said.
Some technologies, such as hydrogen, have great potential for electrifying the industrial sector but are not ready yet. “It’s a little bit of a chicken and egg [situation]. We need more demand for hydrogen, so more people will produce hydrogen and we can bring the price down,” Hight explained.
The data gap
Running industrial processes on electricity from renewable sources can help a company lower its carbon footprint, and this is key because increasingly customers and companies alike want to know a product’s carbon footprint before buying it.
“[In time, companies] are actually going to judge your bids based on its carbon content,” Valanko said. That means that a company needs to either have an answer when clients ask about a product’s carbon footprint or it needs to have an alternative product that the customer wants, he added.
Today, carbon footprinting is a bit of a “Wild West” in terms of how companies approach measurement and how they price emissions into their products, Valanko said.
What we need now is more of a globally standardized system, which gives comparable data … that you can actually negotiate over.
“What we need now is more of a globally standardized system, which gives comparable data, so that you have a [carbon footprint] data point that you can actually negotiate over. And that needs to become a normal part of the contracting and negotiating process for setting a price,” he said. Such a system would help send the demand signal up the chain and trigger investments, he added.
To ensure transparency and traceability, deploying blockchain technology is being explored, Valanko said. Traceability and tracking are important for holding companies accountable against the net-zero commitments that they make, he added.
Needed: Business model innovation
“This is also about business model innovation,” Valanko said. Squeezing out carbon embedded in a supply chain often involves coming up with creative solutions.
For example, a large retailer recently entered into an agreement under which it bought an EV fleet for a small logistics company that it works with, he said. Under the agreement, the logistics company, unable to purchase the fleet outright, agreed to lease the vehicles from the larger company and then purchase them at the 10-year mark, he added.
Often because of the bilateral and bespoke nature of solutions and the possibility that publicly sharing a creative solution could mean diminishing their competitive advantage, companies tend to hold their solutions close to their vest, Hight and Valanko said.
As the industrial sector steps up its Scope 3 decarbonization efforts, a hard truth that it will face is that the assets that industrial companies are investing in have long lifetimes, often upwards of 50 years.
Because electric-powered assets are often already cost-competitive with fossil-fuel assets, one workaround is simply to invest in new electric-powered assets as opportunities arise. When this is not feasible, lower-emitting substitutions can offer a way forward.
“The important thing to recognize is that even though we have some long-lived assets that are in play right now, we do need to retire [these assets] over time. And we do need to accelerate the retirement process [of fossil-fuel assets] as the costs come down for the new technologies that are available for companies to invest in,” Hight said.
Industrial emissions comprise 30 percent of total emissions currently. If business continues as usual, by 2030 the seven industrial sectors that Mission Possible Partnership focuses on — cement, steel, aluminum, chemicals, trucking, shipping and aviation — alone will exceed the total amount of carbon the world can emit this century based on a 1.5 degrees Celsius carbon budget, Hight noted.