Tag: Emissions Scope

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Emissions Trading and Border “Adjustments”

Emissions trading schemes were in the news last week, and China was at the center of the news.

China’s long awaited ETS went live on Friday, after operating seven pilot programs since 2011. It covers 2,225 power plants, responsible for over 40% of China’s national emissions, and is being called the world’s biggest carbon market. Certainly in terms of sheer coverage it is. The 4,000 megatonnes of carbon encompassed in the scheme represents about 12.4% of the global total of 32,300 reported by BP in last week’s Statistical Review of World Energy.

Critics are already pointing out the holes in the scheme.

  • The maximum penalty under the scheme is around $4,600. It’s not a meaningful deterrent.
  • The scheme is unlike other “cap and trade” systems which use a declining cap to drive down emissions annually. Instead, permits are allocated on the basis of plant size and carbon intensity, and given out freely. If a plant exceeds its emissions cap then it needs to go to the market to buy additional permits. However, in practice the quantity of permits issued means that any plant operating at below 85% capacity will have excess allowances.
  • The maximum number of allowances that any non-compliant plant will be required to buy is up to 20% of their allocation. Even if operating at 50% above the allocation, they are only required to buy 20% more. It’s a free pass for the dirtiest of plants.
  • Gas plants are effectively exempt from the scheme. Analysts expect that they will always be net sellers of allowances. Some are even calling the scheme a subsidy for gas power.
  • The market price per ton is set at about $7, far below global averages.

Carbon Brief has a detailed Q&A, with many more data points. Bottom line is that “The ETS in its current form will likely have no impact” (Transition Zero, “Turning the Supertanker”, page 4). China says it’s in a preliminary benchmarking phase. Much will depend on how China enlarges it, and how carbon is priced in the future.

Separately, last week the EU released more details on it’s proposed “Carbon Border Adjustment Mechanism” (CBAM) as part of it’s “Fit for 55” initiative. The Europeans are careful to call this an adjustment mechanism, and not a border tariff. They claim that it’s neutral and will comply with current WTO rules. Essentially, CBAM requires that products imported into the EU have to meet the same emissions criteria as products produced in the EU. Imports will have to be accompanied by emissions certificates, and if they don’t comply they will have to purchase emissions credits on the open market in order to bring them into compliance. The goals are to both prevent European companies from relocating manufacturing to less stringent countries, and to encourage manufacturers in foreign countries to produce clean products for export to Europe.

CBAM is being received by European partners as a tax, and potentially an illegal tax under the terms of the WTO. It’s a headache for the US which has no emissions trading scheme in place. It’s also a headache for China, which will face (potentially) steep tariffs unless it gets its own house in order. Some believe that CBAM could be a forcing function to get global agreements on emissions trading, as it will put exporters at a disadvantage competing in large markets unless they’re willing to comply.

And that brings us back to China. The world has legitimate complaints about China. It is the world’s largest emitter. China also exports more CO2e than any other economy in the world. As the dominant manufacturing country in the world, China’s dirty power makes its way to the shores of every other nation in the world not just as air pollution, but also as scope 3 emissions in the form of the products we buy and use.

Src: WEF Net Zero Challenge: The Supply Chain Opportunity

Bottom line: CBAM, and schemes like it, are the medicine needed to clean up global supply chains, and to force emitters to mend their ways.

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“Carbon-neutral” natural gas? Really?

Natural gas liquefaction plant

Can a container ship filled with liquified natural gas be “carbon neutral”? Shell Oil and Cheniere Energy want you to believe that. In May, the two companies delivered a shipment of gas to Europe in which emissions associated with the upstream costs of processing and liquifying the gas were offset by carbon credits purchased from Shell’s portfolio of nature-based projects. Emissions were offset to the “FOB delivery point”. This means that Shell and Cheniere have offset the emissions all the way to the point of delivery, as indicated by this statement in their joint press release.

The companies worked together to offset the full lifecycle greenhouse gas emissions associated with the LNG cargo by retiring nature-based offsets to account for the estimated carbon dioxide equivalent (CO2e) emissions produced through the entire value chain, from production through use by the final consumer (all scopes).

Shell Oil Press Release, May 5 2021

Really carbon-neutral?

What they’re claiming is that independent of how the customer uses the product they’ve delivered, the product itself has been produced in a carbon-neutral fashion. And, of course, their shipping partners are eager to tout their new green credentials too. Astomos Energy, for example, put out a press release stating that they are now purchasing “carbon-neutral LPG”. The appetite for Cheniere’s new products was strong enough that they posted a 40% increase in revenues from a year ago, and bumped guidance, rewarding investors with a 74% increase in the stock price from this time last year.

Naturally, this has commentators crying foul. Salon labelled it a greenwashing scam. Cleantechnica simply said A tanker full of fossil fuels isn’t carbon neutral. That’s not how it works.

I agree.

Decarbonizing supply chains is hard.

What this illustrates, quite neatly in fact, is the complexity of decarbonizing supply chains. At Davos this year, the WEF unveiled a report titled “Net-Zero Challenge: the supply chain opportunity“. The central thesis was that 8 supply chains accounted for over 50% of the world’s emissions, and that decarbonizing those supply chains would have impact. The energy industry wasn’t one of the eight supply chains named directly. Why not? Energy is an input into every supply chain. You literally cannot decarbonize supply chains without decarbonizing energy itself.

Let that sink in.

It’s good that Shell and Cheniere have taken the small step of offsetting the emissions associated with creating and shipping their polluting products, even if the marketing of those products as net-zero LPG is deceitful. The next step is to decarbonize energy generation itself — Shell and Cheniere’s customers.

Policy is part of the answer

So how do you decarbonize energy itself? Aside from technology solutions, policy is an incredibly important tool. Yesterday the UNEP Net-Zero Alliance, a group of investment managers representing $6.6 trillion of assets under management, released a position paper calling on governments to adopt common approaches on emissions pricing, to apply emissions pricing to every sector of economies (not just the heavy emitters), to swiftly phase out fossil fuel subsidies, and to fund research and create incentives to decarbonize hard-to-abate sectors. This approach — carrot and stick — works. You can see it visually by checking out the current price of European Usage Allocations futures (as at July 7). Emissions in Europe are now nearly $60/ton, up from $20 in April.

EUA December Contract prices, courtesy Ember

What’s next?

We’re still a long way from where we need to be. Analysts say that the price today needs to be closer to $85, rising to $145 by 2030, in order to reach a 1.5C global warming target. Emissions pricing schemes still only apply to 17% of the world’s carbon emissions. So long as emissions prices stay low, and customers exist that aren’t covered by pricing schemes, there will be a market for green-washed inputs like (unfortunately) fossil fuels.

As individuals, there are are two actions we can take.

  1. When emissions trading becomes a political issue in your country, vote in favor of emissions markets, or cap-and-trade solutions. There will always be those who claim that “the market” is the solution. The market is clearly not infallible, as the Shell / Cheniere announcement shows. Vote for emissions trading schemes with teeth, not un-regulated markets.
  2. When you have the option, buy green energy from your local supplier. Do your homework first, though. Make sure that you aren’t being sold green-washed fossil fuel energy, but rather energy from non-emitting sources like wind, solar, or nuclear.

And Shell, Cheniere… we know you have to serve your shareholders, but shame on you for such cynical marketing tactics. We deserve better.

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GREET your vehicle?

Automotive production line. Welding car body. Modern car Assembly plant

Most people know that the carbon footprint of an electric vehicle, in use, is lower than that of an internal combustion vehicle. Except in the rare case that the electricity used by the vehicle is all generated from coal-fired stations, all of the literature confirms this. But what about the emissions impact of manufacturing an all-electric vehicle compared to an internal combustion engine? Well, that turned out to be a bit of a rabbit hole.

The first thing to know is that neither the automobile industry, nor the research models themselves, report data on emissions solely created during manufacture. Argonne Labs (part of the US Dept of Energy), has a comprehensive model called GREET (The Greenhouse gases, Regulated Emissions, and Energy use in Technologies Model) which seems to be the gold standard for all research at this point. GREET has been in development since at least 1999, and models everything to do with vehicular transport. It specifically separates the world into a fuel-cycle model, and a vehicle-cycle model, and what we’re after is the vehicle-cycle, which includes everything from raw materials sourcing, to manufacture, end-of-life, and recycling if applicable.

There are two challenges with GREET.

  1. The output is a “levelized” model. What this means is that it produces a number which is emissions generated per distance travelled. Even though the emissions we are interested in are generated during manufacture, GREET apportions them over the expected life of the vehicle. It tries to answer the macro question of vehicle emissions, rather than helping us to understand the manufacturing emissions cost.
  2. The model itself is incredibly detailed. Although it contains a (large) database of assumptions for all kinds of vehicle types, these will vary from manufacturer to manufacturer. It cannot know, for example, where one manufacturer sources electricity versus another. Only the individual corporations will know that.

GREET is a useful framework. It is being maintained actively by Argonne National Labs and was most recently updated in 2020. Researchers have published papers which claim to use the models, but also (necessarily) make gross assumptions about sources of materials and fuels. The independent research, therefore, can’t tell us much either.

Some of the manufacturers themselves do appear to use the framework. For example, if you read Ford’s 2020 CDP disclosures you will find that they reference the GREET 2019 model in their calculation of Scope 3 up-stream emissions footprint. They simply do not report the results for individual vehicles, but rather report on emissions in aggregate. However, GM and Fiat-Chrysler‘s filings show that they use completely different methodologies at this point, at least for disclosure.

For me, this is an unsatisfying answer. It does illustrate, however, the complexity of analyzing scope 3 emissions, and the challenge that lies ahead in understanding the true emissions associated with products we purchase. It also begs for a consistent methodology to be used across industries.

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Replace Carbon Taxes with Emission Trading

“Why not just put a tax on carbon?”, asked my Dad last Sunday. It was Father’s Day. We had organized a family video call, and somehow ended up talking about climate.

Economists believe pricing schemes are an important tool to fight climate change. They advocate for the use of market mechanisms which reduce emissions by pricing the costs of those emissions at the source. In other words, polluters should pay for the negative impact their emissions have on the planet.

According to the World Bank, at the start of 2021, globally there were 61 carbon pricing schemes in operation or planned. The largest planned is in China, which will come online fully in December of this year. As you might expect, the sheer number of schemes means there are many variations.

Carbon Pricing Approaches

There are two broad approaches to pricing carbon that are in common use today. These are carbon taxes, and emissions trading systems.

Carbon taxes are consumption taxation models. They encourage consumers to choose products that are more emissions efficient by levying a tax on those that aren’t. Need a litre of fuel? Maybe it will cost an additional 15% in tax. The taxing jurisdiction promises to put that money back into energy efficient or climate transition projects, further accelerating the transition to a decarbonized economy. In some jurisdictions (British Columbia, Canada for example) the carbon tax collected is offset by a reduction in other taxes. The promise is that the carbon tax will be revenue neutral, which satisfies at least some of the folks who object to new taxes.

Emissions trading systems (sometimes called “Cap and Trade” systems) use a different approach to driving emissions reductions. Emissions trading systems price the emissions directly. The government sets a cap on the total emissions permissible in a given period, and then allocates emissions quotas to companies that need them. Stiff penalties are imposed for exceeding the quota. Companies can then choose to become more emissions efficient, or continue to emit. If they continue to emit, they can purchase unused quota from another emitter who may be more efficient or pay the penalty. Over time, the government reduces the cap which creates pressure to be more efficient.

Sometimes emissions trading systems are also connected with an auction, as I wrote about Nova Scotia last week. When an auction is used, the quota allocation is done via auction rather than through some other scheme, which should lead to more optimal outcomes. An auction also has the benefit that it raises money for the government to spend on climate transition or energy efficiency projects, just as a carbon tax does.

Which is better?

So why choose one over the other? There are some major differences.

  1. Carbon taxes are easy, broad, blunt tools. If you’re buying fuel, they make a lot of sense. But how do you tax the carbon content of a new home, a car, a pair of jeans, or even a carrot? Each will have differing Scope 1,2, and 3 emissions depending on the efficiency of the producers supply chain. To tax the carbon content of a consumer product accurately, you need to know the contributions at each stage of the manufacturing process. We can’t do that accurately today. Emissions trading systems overcome that limitation. Each company in the supply chain has a quota for emissions, and has to live within the quota. (note: in today’s early stage emission trading systems it’s common to only make the largest emitters comply. Hopefully that will change.)
  2. Carbon taxes may also not be an accurate reflection of the true carbon emissions cost of a given product or service. They are simply implemented as a percentage of the end retail price. An emissions trading scheme allows the market to set the price. To return to the Nova Scotia example from last week, the government set a reserve price of $21 per ton, but the actual price paid was 74% higher, reflecting market demand.
  3. Carbon taxes are also impractical to implement across borders. How should we tax two vehicles, one made in China in a factory powered by coal/electric, and the other made in Detroit? One of China’s competitive advantages has been their willingness to use cheap, and dirty, coal power to power industry. Again, emissions trading schemes make this easier, since they target the emitters directly.
  4. And finally, carbon taxes do not create direct incentives to reduce emissions because there is no cap on emissions. With a carbon tax, you could conceivably have a rapidly growing economy with growing emissions. So long as the rate of growth is high enough, then the emissions tax is simply another tax. In a cap and trade emissions market, the government sets the amount of carbon allowed, and reduces that allowance each year, which creates incentives for companies to emit less.

For those reasons, emissions trading systems are preferable to carbon tax systems. Your thoughts?

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Scope. 1, 2, 3

Getting to a zero carbon footprint, globally, is a hard concept to wrap your mind around. The scale of what’s required is intimidating!

Today’s post is about a carbon accounting concept called emissions scope. Emissions scope helps businesses to account for where emissions occur in supply chains. Then they can focus on where improvements are possible. Businesses that want to perform carbon accounting use these concepts, but we as individuals can also use this them as a framework to think about decarbonizing our own lives.

Emissions Scope. Scope 1 emissions are associated with the operations of the business directly. Scope 2 emissions are from the energy used to run the business. Scope 3 are emissions upstream from business inputs and procured products, and downstream from the use of the products.
Emissions Scope

Definition

  • Scope 1 emissions are from the direct operation of the business, and the assets that the business owns or controls. Scope 1 emissions include the operation of facilities, manufacturing plants and more. They can also include emissions from fuel combustion used to run operations.
  • Scope 2 emissions are from energy purchased to run the business. Buying power or heat from a utility creates scope 2 emissions.
  • Scope 3 emissions come in two categories: upstream and downstream. Upstream emissions are from the inputs needed to run the business — the raw materials used to build products, the capital expenditures to buy equipment, and even the transport of those supplies to the business. Downstream emissions are created after the outputs of the business leave the business — the emissions from the transport of the products to market, the usage of the sold products, and even the disposal of those products.

Impact

When world leaders talk about getting to zero, they are talking about decarbonizing these supply chains. Commitments like the NDCs, and individual country level regulatory actions are fairly blunt tools. They create a framework for businesses to operate within, but ultimately businesses face the hard work of gathering scope level emission data, building governance and reporting into processes, and delivering sustainable products. It’s a daunting transformation. The good news is that these kinds of transformations appear to be achievable with very little impact on the final price for products that we consumers pay. According to World Economic Forum Net Zero Supply Chain analysis, many businesses can get to a net zero supply chain with an impact of between 1% and 4% on final consumer price.

As individuals, and families, we can also apply the same kind of thinking. Scope 2 emissions would be emissions from the energy we purchase to use in our day to day lives. Scope 3 emissions would be from the things we buy, and the things that we throw away. And if you heat or cook with wood, oil or natural gas, or run a creative business like woodworking from your home, these are the actions which are creating scope 1 emissions.

So what can we as individuals do? Here are two suggestions:

  1. We can assess our own carbon footprints. Our scope 1 emissions are likely to be small, because most of us don’t build products ourselves. But we all have scope 2 emissions. All of us consume energy at home. So what are the emissions associated with our own lives? How can we reduce them? Can we buy clean energy instead?
  2. We can make choices about scope 3 emissions in our lives. When we purchase products — cars, houses, computers, food — we can choose to look at the emissions content of the products we are buying. For example, buying locally grown food creates fewer emissions than buying fruits and vegetables out of season from distant countries, which then have to be transported to us. Choosing to bring reusable shopping bags to carry our purchases home reduces plastic waste, and hence emissions. Those are easy and obvious. But the next time you go to make a major purchase, look at the sustainability of the products you are buying, and the commitment of the company to sustainability. More companies are starting to publish reports like this one from Microsoft. More and more, business is responding to customers who “vote” at the cash register for a cleaner future.

Getting to Carbon Zero is a huge task for human society. We all have a role. Let’s not leave it to government, or to business alone. Let’s also reduce at home, and shift our purchasing dollars to companies that value sustainability.