3% Solution: driving profits through carbon reduction

July 8, 2013 | 3 min read

Businesses face increasing risks to growth, productivity and supply chains from climate change, as the frequency and severity of extreme weather events such as droughts, floods, and storms increase, CDP and WWF point out. “Increasing the global average temperature more than 2°C above pre-industrial levels—a path we are now on—would cross a threshold beyond which climate change is expected to have long-term, irreversible, and dangerous effects. According to fourth assessment report (2007) of the Intergovernmental Panel on Climate Change (IPCC), a substantial reduction of emissions is needed to prevent crossing this 2°C increase threshold.” WWF and CDP have commissioned this research to explore if the US corporate sector can profitably reduce emissions between now and 2020 in line with this science-based goal.

Sourcing reduction opportunities

To avoid the 2°C increase, the US corporate sector must reduce total annual greenhouse gas emissions in 2020 by 1.2 gigatonnes of CO2e from 2010 levels. This is equivalent to annual reductions of approximately 3 percent per year across the US corporate sector. To know how much of that gap can be closed profitably by the US corporate sector, the research team adopted targets for climate stabilization from the IPCC and used the data on past and projected emissions from US government energy data sources. To understand the companies’ carbon reduction goals, investments and returns, the report relies on information of 386 companies in the S&P 500 which report data to CDP. They also draw on several reports by McKinsey and Company on carbon reduction through improved energy management, energy efficiency, and renewable energy.

To look at all possible abatement opportunities from those three listed areas using current, commercial technologies, the researchers went on to narrow down the opportunities to those with positive net present value that could also be broadly adopted. The team also interviewed more than 20 large US companies across a variety of industry sectors to understand how they set targets, the returns they achieve, and how they overcome common barriers to making carbon reduction investments.

$190 billion net savings in 2020

WWF and CDP lay out three primary categories of activities from which companies can capture these unrealized savings. The first one is improved energy efficiency through behavioral or management changes. “Simply changing basic operational practices can make a difference, be it switching off lights, monitoring energy use, or identifying and stopping leaks (e.g. steam or compressed air leaks in manufacturing facilities). Just as companies use lean manufacturing principles to improve productivity, some have applied “lean energy” principles to embed efficient practices—a systematic approach that has proven to be one of the most effective and low-cost ways of reducing emissions.”

The second category is increasing energy efficiency through technology improvements. “Examples … include upgrading buildings with energy-efficient lighting and heating, ventilation and air-conditioning (HVAC) systems. Improvements to data centers, motors and vehicles, and recovery of waste heat are further examples.” The third category is the deployment of low-carbon energy—particularly rooftop solar power. The exact savings opportunities vary across sectors. But based on their analysis, WWF and CDP state that their “3% Solution” can create a present value of net savings up to US$190 billion in 2020 for the US corporate sector, excluding utilities.

A practical and strategic pathway

To achieve a maximum of carbon reductions, WWF and CDP present the “Carbon Productivity Portfolio”, a both practical and strategic pathway consisting of five components that can also help create business value. The first is step is setting ambitious emission reduction targets. “To help companies set the right level of ambition, the Carbon Target and Profit Calculator^[1] enables companies to set 2020 targets based on their emissions profile, sector, market share and future growth. The calculator also identifies profits a company may realize if it meets its carbon reduction target.” The second is improving energy management and investment.Besides identifying the earlier stated $190 billion in net savings opportunities, CDP and WWF state additional investments could even reap higher profits. They base this on “the fact 79% of US companies in the S&P 500 that report to CDP, earn a higher return on their carbon-reduction investments than on their overall corporate capital investments.”

Furthermore, the report “provides new indicators for the capital expenditures companies would need to make in efficiency and low-carbon energy to capture the financial savings and to close the emissions gap: investing 3 to 4 percent per year. Numerous company examples provide proof positive that some of the most common barriers to increasing investment are surmountable. Company interviews and case studies reveal that capturing savings is about shifting how management approaches climate investments and values the returns. From bundling investments, to integrating sustainability into strategy, leading companies are showing the way to capturing the full scale of the opportunity.”

Increasing low-carbon energy supplies is crucial, CDP and WWF make clear. “Utilities are the gatekeepers to the carbon intensity of energy available to downstream users. They have a critical role to play in decreasing the carbon intensity of the energy supply using the lowest cost technologies and pursuing energy efficiency in their operations as well as reducing overall energy demand by shaping the energy use of both their business and residential customers. Another step is the development of low-carbon products and supply chains. “Large gains can be made by both companies and utilities to lower customer energy consumption, reduce travel emissions and encourage clean, distributed residential rooftop solar while producing substantial customer cost savings. The last step is engagementwith stakeholders and government. “It is squarely in a company’s interest to pursue multi-stakeholder engagement to enable the innovations in technology and policy needed to speed the transition to a low-carbon future.”