Walking the Talk
Breaking Through the Logjam to Accelerate Decarbonization in the Energy Sector

The purpose of this and the next two installments in the Fair Targets for ESG Performance series is to look at how market methods — e.g., service payments and fees — can be applied in novel ways to reduce carbon emissions in the energy sector without harming the economy. We begin by looking at global goals in the face of current emissions, why so few tangible results have been produced from so much high-level political and media attention (Case in point: COP27 and its predecessors), and what needs to be done to break through the carbon log jam.

First, some math: Over 99 percent of climate scientists agree that the climate is warming, and that the primary driver is GHG emissions (Lynas, Houlton and Perry, 2021). Global net anthropogenic GHG emissions were higher in the past decade than any previous (IPCC AR6 WGIII, 2022) and higher this past year than ever before. In an effort to keep climate change below a level that might trigger significant political chaos, economic displacement and/or social harm, the Intergovernmental Panel on Climate Change (IPCC) provides two targets for human society to achieve: staying below a 1.5°C and a 2°C global area-averaged change in surface air temperature (IPCC AR6 WGIII, 2022). The targets are based on the difference in mean temperature compared to pre-industrial temperatures, defined as the 50-year baseline of 1850-1900. Based on the amount of extreme weather events we are already experiencing with about a 1°C (estimated to be 1.18°C in 2019), the 1.5°C target is clearly preferable; if increasingly ambitious (Matthews et al, 2021).

While several GHGs contribute to climate change, the largest and most well-known contributor is carbon dioxide (CO2) — which is, for that reason, a widely used proxy for overall anthropogenic GHGs. As of the end of 2019, historic cumulative net CO2 emissions were 2,400 GtCO2 in the atmosphere (IPCC AR6 WGIII, 2022). To meet the 1.5° target, we need to keep total CO2 to about 2,800 GtCO2. Thus, we need to limit future emissions to around 400 GtCO2 counting from 2020 onwards (Matthews et al, 2021; Friedlingstein et al, 2021, 2022; IPCC AR6 WGIII, 2022).

That atmospheric accumulation of carbon and other GHGs leads to mean temperature rise and increasing numbers of extreme weather events is not new news — scientists have been talking about climate change for 40 years, and the business world has rallied somewhat around finding solutions: There are numerous other carbon-focused NGOs in addition to the IPCC; CDP invites companies to share their carbon-emissions data; the Science-based Targets initiative has devised technically feasible schedules for industries to reduce their carbon emissions per unit of output (i.e., the carbon intensity of production); and Project Drawdown has researched low-carbon, energy-producing technologies along with their respective startup and maintenance costs. And there are plenty of conferences dedicated to carbon awareness and reductions in one form or another — including COP, which has produced country-specific climate pledges; and Innovate4Climate and the Global Carbon Markets Conference that focus on regional and private sector financing.

And, of course, companies, countries and federations of countries have gotten increasingly involved over the past 20 years. In the EU, day-ahead spot markets for electricity favor renewable energy producers. China has pledged to become carbon neutral by 2050. In the US (notwithstanding the Supreme Court’s disallowance of the EPA as a carbon regulator, the Biden administration target for the country is to reduce net GHG emissions by 50-52 percent below 2005 levels by 2030. Individual states including California and Washington have implemented cap-and-trade carbon markets; and corporations are voluntarily making carbon-neutrality pledges with highly variable degrees of ambition.

Despite all this high-level effort, estimates of current total annual human emissions of CO2 are still increasing and have reached over 44 Gt of CO2 per year (IPCC AR6 WGIII, 2022). At our current emissions rate, we will bypass (i.e., miss) the 1.5°C budget in less than ten years! What meaning is there in pledging to become carbon neutral by 2050 to keep global warming to 1.5°C when we will have exceeded that level 15 years before any pledges take effect? The imbalance between aggregate human demand for carbon sinks and the atmosphere’s remaining supply (i.e., capacity to serve as a sink) is shown in Figure 1 below.

In modelled pathways that successfully limit temperature rise to either target (1.5°C or 2°C), global emissions need to peak between 2020-2025. But under currently implemented policies, global emissions are projected to rise well beyond 2025 — leading to over a 3°C increase by 2100, according to the IPCC. So, why have the collective efforts of national governments, NGOs, forward-looking companies, and citizens had so little impact on curbing carbon emissions? Why is there such a carbon action log jam?

There are three main reasons why high-level pledges are not translating into concrete actions (e.g., investments taken by companies):

1. Carbon-neutrality pledges for 2050, made by companies or countries, are not analytically useful even if we knew and could treat them as if they were true. This is because what matters for climate change (and what needs to be aggregated, allocated, projected and targeted) is the cumulative amount of emitted greenhouse gases. The specifics of a company’s or country’s carbon-reduction path matter; not just the final goal. Therefore, an analytically meaningful pledge that could easily be reported would be the total tons of carbon emitted annually by the entity between 2020 and 2050: pledged, measured and/or projected.

2. Carbon pledges and self-selected targets do not need to — and in practice, do not — align with sector, regional or global targets. To break the logjam, company targets need to align with sector and regional targets so that, in the same way that the aggregate of state populations equals the population of the country, the aggregate of company targets in the energy-producing sector for next year are equal to the aggregate sector target. This is why there needs to exist an objective method for converting global, regional and sector targets into fair company targets.

3. Even if company targets were expressed as cumulative emissions and were aligned with sector targets, there are no market mechanisms active today that would push companies to meet their specific targets. The closest are taxes and cap and trade — but neither mechanism, as currently implemented, incorporates company-specific targets (that align with aggregate targets) and the difference between those company-specific targets and actual performance. As policy tools for behavior change, they are too broad.

If only we could translate global, regional and sector knowledge into fair targets for individual companies (like personalized workout or diet programs) that were expressed as annual emissions, and compare actual company performance with their fair targets, behavior-changing market mechanisms could apply in a customized way to individual companies based on their performance relative to their fair targets. This could steer aggregate energy-producing behavior towards meeting aggregate carbon goals without harming the economy.

For example, one market mechanism could be a broad-spectrum service approach that imposes fees on those producers whose performance is below their fair target; is neutral for those producers whose carbon efficiency matches their fair target; and provides a payment to those producers whose carbon efficiency exceeds their target. Based on aggregate performance and total energy output, fair targets could be adjusted on a yearly basis as needed to ensure that carbon-emissions behavior changes as needed to meet our real aggregate target. Clearly, this approach assumes that it is possible to compute fair, company-specific targets.

This is why in our next installment, we describe what it means to be a fair target; we show how to compute fair targets for companies in the energy-producing sector based on key attributes of their facilities (e.g., fuel type, production technology, location, even financial accounting); and we explain why fair targets provide a much better handle than self-proclaimed company targets and add needed precision to sector targets for steering energy production towards carbon neutrality and our aggregate climate goals without harming our global economy.

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Previous articles in this series:

• Fair Targets for ESG Performance: An Introduction