The Greenhouse Gas Inventory
The Cost Curve
Putting It Together
With the recent release of the Garnaut Climate Change Review’s Draft Report, the Federal Government’s Green Paper on the Australian Carbon Pollution Reduction Scheme, and the National Greenhouse and Energy Reporting system, climate change awareness across the business community has increased significantly. In light of this, many companies are now reassessing their climate change strategy. In the process, they are finding that climate change – in so many different ways – is already having a real impact on performance, and that opportunities are emerging.
For example, we are hearing anecdotal evidence of businesses encountering “climate change clauses” in Requests for Tender – even those RFTs that apparently have nothing to do with climate change. At the same time, we are hearing stories such us that of nab, which is finding that its actions to address the company’s impact on climate change are leading to unexpected benefits, such as improved staff retention and morale, and external benefits in reputation management. Formulating a robust climate change strategy can enhance these outcomes. However, often there is no coherent or coordinated plan to manage the businesses response to this issue. More fundamentally, the basic data required to develop a policy response in a logical fashion often do not exist.
With this in mind, this article discusses the development of two tools, namely a greenhouse gas inventory – or carbon footprint – and a cost curve for greenhouse gas reduction. Together, these tools can assist business to quantify the cost and potential of various responses to reduce its greenhouse gas emissions, thus informing climate change policy development.
The Greenhouse Gas Inventory
A Greenhouse Gas Inventory provides a company with an understanding of its greenhouse gas emissions over a period of time. The inventory is typically broken down by source – for example electricity, natural gas and petrol. A typical process for developing an inventory includes:
- Determining boundaries: For example, should the emissions associated with waste to landfill be included or excluded? Are taxis treated in the same way as employee cars used for business purposes? Should the electricity used for building HVAC being included? Many of these questions can be resolved via reference to international greenhouse gas standards such as ISO 14064, however there is flexibility in the way that the rules can be applied.
- Data gathering: Emissions data are sourced from invoices, interviews and interrogation of information systems. It is often the case that, during data gathering, opportunities to reduce emissions, energy use and/or energy cost become apparent.
- Analysis: The raw data are coverted to CO2-e (CO2 equivalent) using established methodologies, then aggregated to create a chart similar to that shown below.
The effort involved in producing a greenhouse gas inventory varies, depending on:
- The number of sources that are deemed to be inside the boundary. For example, including the full lifecycle emissions of products is more difficult than including emissions from electricity use and direct emissions from fossil fuels.
- The quality of data available: for example, electricity consumption data may be readily accessible and centralised, or contain gaps and be distributed across several functional areas.
- The level of detail required. For example, a full breakdown of electricity use to show the various usages – lighting, kitchen, office equipment, etc. – will take longer than a single category of “electricity”.
- The level of accuracy required. For example, invoices for diesel use may show total purchases of fuel, but there may be no way of knowing how much diesel was used over a particular period. A rough estimate may be quick, but will be less accurate than probing for more accurate data.
The accuracy or granularity of the inventory can also be improved by including a larger range of "optional" emissions sources, such as the embedded emissions associated with copy paper, office furniture etc.
Figure 1. Emissions Sources
The Cost Curve
While a greenhouse gas inventory can inform the size of the effort required, a cost curve will complement the inventory by providing a company with the information it needs to prioritise its GHG reduction activities. A typical process involves:
- Identifying candidate projects: The methods of generating projects vary, but it is sometimes worthwhile holding workshops, in which employees are asked to come up with ways to reduce emissions, thereby simultaneously educating and gaining the
benefits of their engagement on the issue.
- Evaluating projects: Projects are coarsely screened to determine those most viable. Each project in the shortlist is then evaluated on its merits, using a “baseline and credit” methodology, to determine the cost per tonne of abatement.
- Charting the results: Although the results can be presented in tablature form, the clearest representation is that of a cost curve, similar to the hypothetical curve shown below. The benefit of this type of representation is that the marginal cost of abatement for a given reduction goal is intuitive.
Figure 2. The Cost Curve for Greenhouse Gas Reduction
To be useful, projects must be defined to a reasonable level of detail. This may reduce the breadth of the assessment, but initial screening of potential projects will assist in narrowing down those with the greatest potential for further investigation in an efficient manner.
The effort involved in constructing a useful cost curve varies widely, depending on the number and type of projects that are evaluated and the required accuracy of the analysis for each. There are many ways to do this, but two options are:
- Option 1: The simplest method would be to assess a small number of representative projects. The analysis for each project would be limited to a rough cost and greenhouse gas reduction estimate. This approach would not allow for an accurate estimate of potential abatement opportunity – that is, how many tonnes of CO2 could be abated using this method – but an indication of this could be provided, again as a range estimate.
- Option 2: Moving up one level, a larger number of projects could be brought into scope, along with a more accurate estimate of cost, benefit and abatement. Building in an estimate of potential abatement opportunity would allow for construction of a more traditional cost curve.
There is, of course, the ability to mix and match these approaches. For example, workshops could be conducted, then opportunities screened to a defined number of shortlisted projects, which are then evaluated to provide a cost curve.
Putting It Together
The purpose of all of this is to provide senior management with a rational approach to climate change policy development. Ultimately, the information provided by these tools can be used to assist with the overall integration of climate change into corporate strategy. For example, for many office based organisation, which usually have low emissions intensity but use quality rather than cost as a competitive advantage, it may be viable to become carbon neutral. If this option is tabled as part of strategy development, the cost curve will be critical to understanding the likely cost associated with this approach.
Figure 3. Process Cycle
The process cycle shown above illustrates how the two tools can be used in policy setting; the GHG Inventory is shown in the diagram, while the Cost Curve is an important input to the assessment of risks and opportunities. Other considerations that might be covered as part of a climate change policy include:
- Overall position on climate change (i.e. is it real? Is it serious?)
- Approach to managing contribution to climate change (e.g. emissions reduction target, direct and indirect emissions reductions prior to offsetting)
- Position on emissions boundaries (i.e. which sources are included or excluded from the inventory)
- Organisational guidelines on emissions reduction activities (i.e. what types of activities are encouraged vs those that are considered undesirable). This will likely draw heavily on the cost curve and may involve consideration of procurement processes, travel policies, product development, community based programs, verification and monitoring and external communications.
- Organisational guidelines on offset procurement (i.e. whether or not offsets will be procured, what types of offsets are acceptable)
- Extent of staff engagement and participation in the process
For most organisations, climate change is viewed as a deeply confusing area that is not a part of core business. However, more and more businesses are finding that its implications are appearing in unexpected places.
Crafting a comprehensive strategy with complementary policies is an important first step in the journey to integrate climate change into corporate strategy. Those that move swiftly to embrace its potential will find themselves with a competitive advantage over their rivals.
Author: Tim Burrows
Source: Climate Managers