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How your firm can adjust as energy gets more & less carbon-intensive

<p>For companies thinking about climate change and energy, what are the implications of two countervailing trends, the rise of energy with lower carbon content, and the concurrent rise of high-carbon energy?</p>

Recently, Bank of America and Citigroup were both labeled the "greenest" banks at the same time another group called them the "filthiest." The first name was for investing in clean energy and reducing emissions from operations, while the latter was for providing financial support to carbon-intensive energy such as coal.

In a similar vein, a survey of boom industries shows that one of the top areas for growth in the economy is renewables. And oil and gas. And unconventional energy production such shale drilling.

What can we take away from this jumble of signals? The energy sector is growing on all sides, with nearly US$40 trillion in infrastructure being developed to meet global energy demand, which is on track to rise 40 percent by 2030. As a result, energy -- which is already directly responsible for more than 60 percent of carbon emissions -- is getting more and less carbon-intense.

On the one hand, renewable and hyper-efficient energy production is rising fast, with wind, solar, and biofuels growing from nascent technologies just a few years ago to mature and commercially viable today. On the other hand, the rise of developing economies and more power-hungry industries is driving a quest to uncover the cheapest energy wherever it is found, leading us into an era of "extreme energy," defined by the widening pursuit of unconventional fossil fuels -- those resources that are more difficult to extract and which come with greater environmental consequences.

Over the past year, BSR has been exploring what these trends mean for companies that are trying to address their greenhouse gas (GHG) emissions and become leaders in sustainable energy solutions with our Future of Fuels initiative. It is clear that if current trends hold, the beneficial climate impacts of renewables, which are growing rapidly on a very small base, will be more than offset by the much larger, faster growth in conventional and unconventional fossil fuels. This has important implications for companies that are trying to manage and communicate their climate impacts, as this article will highlight.

Before we turn to these implications, however, it is important to point out another lesson in our Future of Fuels work that will be the subject of articles later this year: There is much more to the energy story than carbon, including a complex set of additional sustainability issues such as human rights, ecosystems health, economic development, and national security impacts. This complexity is unfolding dramatically with shale gas development, which is unlocking a huge amount of natural gas supplies in the United States that may replace more carbon-intense coal. At the same time, however, there is concern that the high-volume, hydraulic fracturing techniques used to produce the gas may threaten water supplies with chemical pollution and even lead to earthquakes.

Our Future of Fuels work will create a comprehensive framework to help companies manage the total sustainability impacts of fuels, but for today our focus is on carbon.

The Rise of Lower-Carbon Energy

You probably know about the first story: Renewable energy is scaling up in a big way. In percentage terms, it is the fastest-growing energy sector. Generating capacity for solar and wind has been expanding in the double and even triple digits annually, and today, both technologies are commercially viable in Germany, Spain, and the U.S. states of North and South Dakota and California. Solar prices also have dropped dramatically; at a solar power auction in California just last month, developers sold projects to utilities at lower rates than were available from the existing power grid. As for wind, it is reasonable to expect that it could power 20 percent or more of the entire U.S. electricity grid by 2030.

Lower-carbon transportation fuels are also being deployed rapidly. In Brazil, the most advanced biofuels market in the world, virtually all new cars can run on any mix of gasoline and ethanol. In the United States, which already produces enough ethanol for 10 percent of its fuel, the electric vehicle industry is tripling in size annually.

Finally, we are in the midst of a natural gas boom, with shale-led gas production in the United States displacing gasoline and coal; new markets for natural gas are also developing around the world. In terms of climate impacts, this is positive, since natural gas is about a quarter to half as carbon-intense as traditional gasoline and coal.

The Rise of Higher-Carbon Energy

What seems to be less widely known, however, is that for all the growth in low-carbon energy production, energy is, in many cases, becoming more carbon-intense. The fastest‐growing global energy source remains coal, which has met around 50 percent of new electricity demand over the last decade (solar and wind, by contrast, have made up only around 1 to 2 percent of the growth), and is on track to rise another 65 percent by 2035. This demand is driving new investments in coal mining in Australia, Indonesia, Russia, and Mongolia. And though coal is being displaced by fuels like natural gas in some regions, it is nonetheless likely to be developed for use elsewhere. When Jim Rogers, CEO of Duke Energy, the largest U.S. utility, was asked what he would do with all his company's extra coal, his answer was simple: "I guess we'll be exporting it to China."

Scope 3 Energy Category Cheat-Sheet
The Corporate Value Chain (Scope 3) Accounting and Reporting Standard outlines 15 categories for companies to manage with respect to value chain emissions. What follows are typical business activities related to energy, followed by their corresponding industry, Scope 3 category it applies to, and page numbers in the calculation guidance [PDF].

Using electricity and fuel in operations (all industries): Fuel and energy related activities (page 30). Includes subcategories A, B, and C.
Outsourcing energy-intensive operations such as data centers (all industries): Purchased goods/services (page 13).
Selling coal and other energy resources to generate power elsewhere (energy producers, power companies, utilities): Use of sold products (page 77).
Trading or brokering energy assets (energy, energy trading, and financial services companies): Fuel and energy-related activities (page 30). Includes subcategory D.
Investing in equity and making loans for energy (financial services): Investments (page 97).

Meanwhile, future oil production is likely to come increasingly from unconventional sources that require more energy and resources to produce. These sources, previously considered too costly to pursue, include bitumen from U.S. and Canadian oil sands, extra heavy oil from Venezuela, and oil shale. From an energy user's standpoint, emissions from direct electricity generation and transportation are virtually the same as conventional varieties, but the processing upstream is between 10 and 70 percent more carbon-intensive.

Finally, just as radical breakthroughs are being made in clean energy, there are also new experiments with even more carbon-intensive configurations. To wit, the process of deriving synthetic liquid transportation fuels from coal, or "coal-to-liquids" (CTL), which uses chemical and thermal processes to create drop-in fuels such as gasoline, has twice the carbon footprint of conventional varieties. Though CTL fuels are banned for government use in the United States, there are economic incentives for the expansion of commercial-scale production facilities such as those in Sasol, South Africa, and Shenhua, China.

The Bottom Line

In the end, while low-carbon energy technologies are making progress, fossil fuels continue to outpace them. The renewable energy technologies of solar, wind, ocean, and geothermal comprise a minor part of the overall mix -- just around 3 percent of total for electricity generation, and 0.05 percent of total energy sources. In fact, renewables are projected to rise to only around 15 percent of the total energy picture by 2030, even assuming good progress.

It is therefore critical that companies and policymakers interested in the climate impacts of energy develop a comprehensive energy strategy that includes three things: radically improved efficiency/demand reduction, accelerated development and deployment of alternatives, and strong measures to reduce the climate impacts of all fossil fuel types that will be a major part of the mix for at least the next few decades.

As they do, and while our energy mix becomes more varied, companies should consider the following tactics to help achieve their aims:

  1. Understand the total lifecycle impacts of your energy sources. Understand the sources of energy throughout your business networks, where future regulation is most likely to affect the company, and which investments will accelerate low-carbon energy. This means making sure your view of energy supplies is up to date, because energy grids evolve rapidly, as they have done recently in Germany and Japan, where the sudden replacement of nuclear power with natural gas, coal, and fuel oil increased the country's carbon intensity by about 5 percent.
  2. Understand how siting choices affect the GHG profile of your energy mix. Where your company sites (or purchases from) data centers, manufacturing operations, and other energy-intensive facilities will influence the total carbon impacts and therefore whether you're meeting your sustainability objectives.
  3. Measure the carbon impacts of energy throughout your value chains. Evaluating the energy impacts of your company's value chain means looking beyond its four walls. Companies should do this using the GHG Protocol's Scope 3 framework. (See the sidebar for a summary of common energy-related business activities and their corresponding Scope 3 categories.)
  4. Involve stakeholders. As the bank examples noted earlier in this article show, it is not enough in the era of extreme energy for a company to stake out bold positions without involving diverse stakeholders in planning. The opinions of civil society groups play a major part in the company's perceived sustainability impacts, even for solutions that may seem to be cut-and-dry engineering projects. Companies should tap and build common ground with potential thought leaders and influencers before making major commitments.
  5. Communicate your underlying story. The new frontier of climate reporting is to go beyond data disclosure to focus on the process of continuous improvement, and to share key insights and context behind the numbers. It is important to know the trends related to the fuel represented in the "conversion factors" -- those numbers that describe the carbon content of different energy sources. Also, understand and communicate about your company's role in all aspects of energy, from enabling cleaner energy to minimizing emissions for carbon-intensive energy. Don't give critics an opportunity to accuse you of cherry-picking the most favorable results.
  6. Advance sound public policies. While companies can drive innovation on their own, some of the most powerful work they can to is to influence political leaders to develop public policies that guide energy markets toward lower climate impacts This is just good business: Carbon-reducing policies are increasingly on the way. Since companies need long-term predictability and appropriate economic incentives to make rational long-term investments in better energy, it is up to them to advocate for it.
  7. Think beyond climate impacts. Finally, companies need to start developing strategies that account for the fact that there are additional considerations beyond climate change, which range from biodiversity to human rights impacts to economic development. These issues must be included in an overall assessment of the sustainability impacts of energy. This is no small task, but it is essential given that we are going to be wrestling with energy sustainability for many decades to come. In the coming months, watch for more on this from BSR as part of our Future of Fuels initiative.

Electrical grid photo via Shutterstock.

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