The Challenge of Global Warming
- Dec 4, 2021 5:23 am GMT
Greenhouse gas reduction. Carbon footprint. Global warming. These are front-page issues of universal concern, and while the debate often revolves around the impact on the environment and human life, global warming will have a tremendous impact on our collective economic future.
According to the Economist Intelligence Unit (EIU), if we continue on the current path, climate change could reduce global GDP by 3% by 20501 – that’s $7.9 trillion stemming from increased droughts, floods, crop failures, and infrastructure losses.
It’s clear that for companies in the energy sector, global warming is also a mandatory and immediate challenge. The U.S. Energy Information Administration (EIA) forecasts that global energy demand will increase by 50%2 by 2050. Clean, renewable energy sources will provide an increasing chunk of the total energy pie by 2050 (28% according to the EIA), but natural gas and petroleum products will still provide nearly half of energy consumed. Which means that greenhouse gases (GHG) will continue to damage the environment. So it’s no surprise that policymakers and legislators are asking one key question of energy companies: What are you doing for the environment?
It’s not possible to lower greenhouse gas (GHG) emissions without deliberate and strategic interventions. So for energy companies, the answer to the question, “What are you doing for the environment?” requires posing a different question: “How can we jumpstart meaningful strategic change?”
Wipro has developed a strategic framework designed to help energy companies make good decisions about decarbonization: lowering the amount of greenhouse gas emissions.
Change Your Mindset – Change Your Strategy
The pressure for solutions is intense, particularly for the major oil and gas producers, given their enormous investments around the world. With hydrocarbon products, elimination of emissions is impossible, but decarbonization is a cornerstone of answering the question, “What are you doing for our environment?”
Decarbonization typically takes the form of one or more of the following well-known, well-understood, and effective approaches:
- Absolute or “net zero” emissions reduction through improving the operations lifecycle and optimizing the value chain
- Carbon capture and storage to prevent emissions from entering the atmosphere
- Offsetting emissions by investing in projects to negate the impact from existing operations
The real challenge is changing the mindset of the enterprise so that decarbonization-focused decision-making becomes engrained in the organization. In other words: How can energy companies create a strategic approach that fits their ethos and culture, delivers tangible results, and doesn’t radically upset existing operations and financial stability (which is what will fund the initiatives in the first place)?
Wipro’s strategic approach to decision-making can nurture the mindset of promoting and adopting low-carbon initiatives. Called the RCL framework (for Reagents, Catalysts, and Levers), this approach enables energy organizations, big and small, to find low-carbon solutions in their existing value chains and evaluate new products/offerings using a sustainability perspective.
New ideas and solutions tend to fall through the cracks if not nurtured. The RCL framework recognizes this, providing mechanisms to motivate and incentivize the entire organization to be a part of this journey. Moreover, all energy-related strategic initiatives need a common foundational base to build on. These become the levers of success and are the fundamental requirements within the RCL framework.
Bottom line: The RCL framework ensures that decarbonization-focused decision making becomes a part of how the enterprise works. Decisions based on a holistic framework and a clear strategic mandate lead to better outcomes.
Start With Good Metrics
Getting started with RCL-driven decarbonization requires good data, typically generated through a well-known approach for measuring absolute and relative GHG emissions (gases apart from CO2 are typically converted into CO2 equivalent for maintaining consistency):
- Scope 1 – Direct emissions from operations, such as extraction, refining, etc.
- Scope 2 – Indirect emissions from the generation of purchased electricity
- Scope 3 – Indirect emissions from everything else and outside the company’s direct control, such as third-party transportation, etc.
Scope 3 emissions are challenging to measure and don’t feature prominently in regulatory or internal reporting. But Scope 1 and 2 emissions, if properly identified and tracked across value chains, can be reduced through a combination of various options.
Then Evaluate Using the RCL Framework
The RCL framework is comprised of three components:
- Reagents outline initiatives to identify and evaluate projects that help reduce, capture, or offset GHG emissions throughout the value chain.
- Catalysts accelerate this process and foster a community of decarbonization champions within the enterprise.
- Levers are the enablers of success for every initiative.
Reagents: What Can I Do to Decarbonize My Operations?
Step 1: Incorporate environmental data into performance management decisions.
Start by including environmental performance benchmarks at the group and functional levels of the enterprise. Using Scope 1 and/or Scope 2 GHG emission numbers as a variable in performance optimization ensures decisions are no longer made solely on revenue or margin criteria, allowing some tolerance towards reducing emissions. Organizations that do this effectively have been able to make meaningful reductions to their GHG emissions while maintaining the health of their balance sheets.
Step 2: Optimize operational efficiency.
A significant amount of GHG emissions can be reduced by improving energy efficiency across value chains. This requires modern sensors and data collection, standard data analysis, and forecasting methodologies to optimize operational efficiency. For example, Chevron’s Upstream Energy division leveraged predictive analytics along with monitoring and optimization software to drive improvements in energy efficiency that directly translated to reductions in GHG emissions. From 2014 to 2017, Chevron reduced GHG emissions in its San Joaquin Valley business unit by 180,0003 metric tons; from 2014 to 2016, the company reduced energy intensity by 27% in its IndoAsia business unit.
Another example: Gazprom, the Russian energy giant, ran an energy-savings and energy-efficiency program covering methane leak monitoring, assessment, and documentation, generating savings of at least 28.24 million tons of fuel-equivalent from 2011 to 2020.
Asset-management decisions based on modern sensors, data collection, and information management make it easier to achieve targets and efficiencies.
Step 3: Employ life cycle assessment.
Product life cycle assessment (LCA) involves measuring the environmental impacts associated with all the stages of a product’s life or process and offers another approach for oil and gas companies to evaluate their processes and products. An LCA is a decision-support tool that can help ensure a company’s choices are environmentally sound in terms of design, manufacture, or use of any product or system. LCAs form the basis for evaluating the impact of various activities along the energy value chain and for analyzing new ventures through various lenses such as investment decisions, partnership evaluations, country specific policies, among others.
An LCA approach also helps companies discover important product or process improvements, or benchmark their products or processes against other organizations. The figure shows the comparison of diesel and biodiesel as an outcome of an LCA study5 comparing cost, environmental impact, and social impact. Such comparative studies help making decisions related to product development or process improvements.
When done appropriately, an LCA helps identify hotspots and can reveal underlying risks and even hidden opportunities.
Catalysts: What can accelerate adoption of low-carbon initiatives?
Reagents are accelerated by taking innovative steps in the form of catalysts. Successful innovation is largely driven from within, and it’s rooted in engaging the organization to make sure everyone feels they are contributing and helping to incorporate new ways of working that drive behavioral change.
Step 1: Create a carbon green fund.
Finding and nurturing new ideas is a real challenge, and an internal carbon green fund for eliciting, evaluating and investing in new technologies and innovative projects can accelerate the decarbonization journey. Funds can be centrally managed by finance teams in collaboration with safety and organizational groups to improve effectiveness and efficiency. Creating workflows around this process can enhance the process of capturing new initiatives, analyzing their potential, measuring potential savings, and, ultimately, approving the funds.
Step 2: Levy internal carbon prices.
Many energy companies (and companies in other sectors) use “internal carbon pricing” – making carbon dioxide emissions an explicit cost so they can see the impact of emissions on financial and investment decisions. In 2017, around 1,4006companies actively used internal carbon pricing – and that number is growing. Government initiatives have played a role in driving this as well; Mexico, Sweden, and British Columbia have levied carbon taxes, while several European countries and the state of California have instituted cap-and-trade programs. These geo-level initiatives provide a model and framework which can be adopted and suitably modified for creating smaller scale internal carbon pricing initiatives within organizations.
Internal carbon pricing can help in multiple areas:
- Capital investment decisions
- Risk management
- Strategy formulation
- Enforcing behaviors
- Encouraging businesses to go for low carbon investments
The price of carbon depends upon the industry, the geography of operations, and a company’s objectives. Some companies also put a real price on carbon so that teams are encouraged to take necessary steps to reduce emissions. The funds collected by internal carbon pricing can be used to fund low-carbon initiatives.
Microsoft became carbon neutral in 2012 by levying a carbon price (ranging from $5 to $10/ton7) and holding businesses accountable for emissions across Scopes 1, 2, and 32. The money collected went toward various efficiency-improvement and emission-reduction initiatives.
The key challenge lies in structuring and tracking the pricing mechanism. This needs to be monitored in near-real time and bounded by automated or manual just-in-time interventions. This ensures that pricing mechanisms and their use reflect the organization’s business priorities, instead of devolving onto another business unit. It’s essential that projects are centrally managed and benchmarked in accordance to the function and organization performance.
Successfully executed programs need a mix of domain consultants and organization champions. The domain consultants (internal or external) bring experience of external carbon prices and an understanding of the local and global policy regimes. The organization champions are the company’s voice for contextualising what works best for their existing supply chain and operations.
Step 3: Trade carbon internally.
Building on the basics of carbon pricing, organizations can also mimic the cap-and-trade framework internally with their own trading (or even gamified) platform to aggressively reduce their carbon footprint and achieve substantial emission reductions. Many countries/regions, including Europe, have successfully implemented Emissions Trading Schemes (ETS), which are similar to internal carbon pricing. Organizations can adopt ETS frameworks to implement internal carbon trading mechanisms.
A robust interal carbon-trading mechanism will showcase the below elements in one or the other form:
- Identify an emission reduction target.
- Establish a timeframe to achieve the targets.
- Sell carbon credits to the functions in the organization.
- Allow those functions to trade carbon credits.
- Reduce carbon credits each year to make the process competitive.
Just as with internal carbon pricing, the key to successful carbon trading is having a mix of domain consultants with knowledge of the mechanisms counterbalanced with internal SMEs who contextualize what works best for their existing supply chain and operations.
Levers: What will enable my organization to implement reagents and catalysts?
Strategy and plans are great, but they often fail when organizations neglect the basics. That’s where change levers are so valuable. These core functionalities and practices make real progress possible by enabling implementation. In fact, without these starting points of serious decarbonization initiatives, it’s difficult (and maybe impossible) to move toward net zero.
1. Strive for data sanctity.
The old maxim about data-driven insights is absolutely true when it comes decarbonization initiatives: garbage in, garbage out. But it’s difficult to accurately capture emissions data and forecast them across discrete parts of the value chain. Some of the major energy companies do it better than others do, but every company has ample opportunities to – forgive the pun – refine the process.
Start with a comprehensive evaluation of the existing process lifecycles for various functions and business units. This will enable key stakeholders to know how they fare on Scope 1 and Scope 2 emissions. This evaluation can be broken down by any number of granularities, such as asset, asset class, region, or division. A monthly optimization frequency is effective.
Decision makers can now work with meaningful correlations between operational and environmental performance, enabling tactical decisions in near real-time. Paying attention to data sanctity can transform a worthy vision statement into tangible, and continuous, progress.
Leveraging existing data gathering infrastructure and investing incrementally in sensor-driven data collection are the key components of automating data, end-user reporting, and insight generation. This eliminates the manual burden of assimilating data points from siloed sources and spreadsheets.
2. Embrace leadership-driven sustainability change management.
Aspirational goals like decarbonization must be driven by senior leadership. Their investment in the process is key to shaping an enterprise’s charter over the near term and the long term. A dedicated Chief Sustainability Officer (CSO) is the most concrete sign of an organization’s commitment to decarbonization, serving as a useful interface between senior leaders and the rest of the organization.
The CSO is not just a token role to promote low-carbon initiatives. The CSO works in tandem with the leadership team to balance the energy organization’s net-zero journey in the context of various business groups and sound financial metrics to ensure profitability along the way. Typically, a CSO “owns” the implementation of change reagents and change catalysts, maintaining a balanced, group-level view of how things are progressing so initiatives and organizational priorities are not skewed.
The effort begins by independently benchmarking each business group on its Scope 1, 2, and 3 emission levels, then moves to setting targets and evaluating initiatives and their viability. These then percolate into the independent functions that will own relevant activities and KPIs, balancing decarbonization measures with individual P&Ls.
The Framework Leads to the Solution
The RCL framework is just what that word implies: a framework for strategic decision making. The reality is that there is no single solution for every organization, because each one has a unique outlook and set of strategic priorities – even if the macro-level goal of reducing emissions is unambiguous. Therefore, it’s key to apply the RCL framework with due consideration to the overall business strategy. RCL enables the enterprise to inculcate decarbonization as a strategic priority within every business.
The starting point of this journey lies in the levers outlined in the RCL framework. Apply the levers to make reagents and catalysts effective and productive. Pay attention to data sanctity so the reagents and catalysts have something real to work with (and aren’t based on wishful thinking or guesswork). Sustainability leadership underscores the organization’s commitment at the highest levels and ensures a stewardship approach for the entire organization by serving as an arbiter between operations, financials and decarbonization ambitions. Ultimately, cultural changes are the difference maker and can enable energy companies on their journey to sustainability to be tangible and profitable – as well as providing a great answer to the question: What are you doing for the environment?
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