As nations worldwide continue to strengthen their Paris agreement commitments, and more organizations look to set new aggressive carbon reduction targets in line with a net-zero emissions scenario, many companies risk significantly missing their targets or suffering crippling capital losses due to stranded assets. In the mildest scenario, organizations without a bottom-up carbon reduction plan risk making capital-inefficient decisions and losing competitive advantage to more carbon-savvy competitors.
The Paradigm Shift
A decade ago, a company would be seen as a leader for disclosing their Scope 1 and Scope 2 carbon footprint and setting marginal carbon reduction targets; fast forward to today and the new de facto standard is a comprehensive Scope 1, 2, and 3 inventory, along with a science-based net-zero target to be reached by 2050 at the latest. All things considered, reaching a 5% reduction target within the operational boundaries of a complex organization is a fairly straightforward task: determine your most significant sources of carbon emissions using materiality analysis as a guide and find low-carbon alternatives. In many cases, that might mean switching to renewable energy, electrifying your vehicle fleets, or switching to biofuels.
A net-zero target is a different creature altogether, since it entails transforming the vast majority of your operations (and extending to your value chain) over a multi-decade period to permanently eradicate sources of GHG emissions. Many companies have opted to short-circuit this process and claim an early victory by jumping straight from developing a carbon inventory to purchasing carbon offsets to neutralize their emissions. While offsets have a role to play in the early stages of a decarbonization journey, they are not an adequate solution to permanently decarbonize the world economy.
Business as Usual: The Top-Down Approach
A typical corporation has 100s of operational sites and 1000s of individual sources of emissions, with some larger enterprises extending into the thousands of sites and tens of thousands of sources of emissions. Add to this the ever-evolving regulatory landscape across tens of jurisdictions, capital market environments, and new technology availability over time and the result is a seemingly intractable, constantly shifting problem. The natural tendency might be to focus on the obvious risks and opportunities, often those directly related to the main line of business, however this often results in missed opportunities at best, and latent existential risks at worst:
- Will operations in North America continue to be cash flow positive with a carbon tax in place?
- Up to which price point?
- Should the vehicle fleet operating in California’s low-carbon grid (498.7 lbCO2e / MWh) be electrified first or the one in the carbon-intensive American Midwest(1,676.8 lbCO2e / MWh) ?
If treated as a temperature check, a top-down carbon analysis done with estimated sector-based or regional emissions factors can be a good first step for a company looking to understand their carbon exposure for the first time, but it can quickly become a liability if it isn’t soon followed by a carbon abatement strategy built from the bottom-up and based on primary activity data. Top-down historical emissions factors are by definition delayed, often years behind and obfuscate the nuances of a specific company within a sector or region; the performance of leaders and laggards is averaged into a single combined number.
Similar issues arise when using sector-based or regional marginal abatement cost curves; the mitigation options considered ignore the company-specific resource consumption patterns, access to capital markets, or operational constraints.Beyond the accuracy and relevance limitations, without the emissions-source resolution it becomes increasingly difficult to find reduction opportunities or alternatives to business as usual; you replace specific industrial processes and vehicle fleets, not hypothetical quantities of CO2e. While a top-down approach can be tempting for its apparent simplicity, it is inadequate to build a pathway to a net-zero future.
New Market Standard: The Bottom-Up Approach
A bottom-up approach, in contrast, utilizes a company’s activity data (eg. fuel type, vehicle models, specific industrial gases used, etc.) to compute a baseline of resource consumption and the associated emissions, using standardized formulas specific to each source. Mitigation options can then be modeled on top of these baselines, taking into account the actual resource costs negotiated by the company, the upfront investment requirements, ongoing operational costs, the site and project-specific cost of capital, and many more details.
The additional granularity also unlocks advanced analysis tools such as Marginal Abatement Cost Curves, Levelized Cost of Carbon Abatement, and Emissions Pathway scenario analysis, all of which are available within the SINAI decarbonization platform.
The end result is a portfolio of abatement solutions that reflects the reality of the business, and a carbon abatement strategy that suits the corporate short and long term goals. While any scenario planning exercise has inherent uncertainty, this drastically more sophisticated approach can ensure companies take advantage of opportunities uniquely available to them and avoid risks that might hide behind sector and regional estimates.
Gathering and managing information at this granular level might seem at first like a daunting task, just as modeling abatement scenarios across the myriad of variables can seem a task unfit for humans, and it is. Luckily, computers are pretty good at this, and just as CAD software revolutionized the manufacturing industry; automated carbon strategy modeling software is instrumental to meeting aggressive carbon reduction targets. Using a consistent, well tested system across the entire value chain drastically reduces errors and time-to-action; it enables stakeholders to focus on collaboration, idea generation, and scenario planning.
This is exactly what we are working on at SINAI: an automated, highly collaborative platform that extracts value out of the company’s uniqueness, diversity and complexity, rather being held back by it.
Ultimately, a successful company does not make critical business decisions blindly based on the average of what their peers are doing; a successful emissions abatement strategy should be no different. At SINAI, it is our mission to ensure organizations have the tools and the analytical framework required to plan for and achieve a carbon free future.
Alain Rodriguez is CTO and Co-Founder at SINAI Technologies. Formerly, Alain was an early-stage Uber employee, founding member and tech lead of Uber’s Knowledge Graph, Data Infrastructure team, and Realtime Business Metrics platform.