To get to net zero many companies are creating emission reduction targets

Many companies are under increasing pressure from their shareholders and stakeholders to commit to reducing their carbon footprints in a significant manner over time. Failing to do so may raise reputational concerns, with adverse implications for financial performance.

Recognizing these drivers, since the Paris agreement, more than 1200 companies have committed to climate action through the We Mean Business Platform and over 800 companies have committed to setting science-based targets. Recent examples of financial institutions setting net-zero target are Barclays, HSBC, and J P Morgan Chase.

These targets include self (Scope 1) and suppliers (Scope 2 and Scope 3) emissions

The carbon exposure of a business entity – e.g., a corporate or a financial institution – is typically measured in three different ways.

• Scope 1 emissions are the entity’s emissions due to its own activities, e.g., coal power plant emissions for the corresponding power producer.
• Scope 2 emissions are the emissions from the electricity procured by the business entity, e.g., the coal power plant emissions for the corresponding buyer of electricity.
• Scope 3 emissions are the emissions of the remainder of the supply chain, of both upstream and downstream activities.

Thus, in a way, Scope 2 emissions are a special kind of Scope 3 emissions, but they are counted separately due to historical reasons.

The greatest opportunity is in reducing Scope 3 emissions

However, the greatest emission reduction opportunities lie in Scope 3 emissions going forward, given that on average the Scope 3 emissions are 5.5 times the amount of combined Scope 1 and Scope 2 emissions. For example, for Lego and Walmart, Scope 3 emissions constitute 75% and 90%, respectively, of total emissions.

As other examples, Larsen et al show that upstream Scope 3 emissions are up to 95% of Norwegian municipalities’ total emission footprints; and Carbon Disclosure Project finds that most of the supply chain emissions are in bought or sold product categories, as defined by the Greenhouse Gas Protocol. In fact, it has now been established that more than 50% of the world’s carbon emissions are in eight supply chains.

Therefore, while the historical focus has been on Scope 1 and Scope 2 emissions, now the focus is starting to shift to Scope 3 emissions, not only for assessing the carbon risk of the supply chain but also to hold business entities responsible for the whole supply chain. This also ensures that the carbon emissions of a business entity are not simply pushed to other parts of the supply chain.

For many companies, many of the suppliers are in Asia, e.g., in China

For instance, self-reported data from Wesfarmers in Australia shows a negative correlation between Scope 1 (or 2) emissions and Scope 3 emissions, indicating that Scope 3 emissions typically go up due to leakage as companies reduce their Scope 1 (or 2) emissions.

In fact, about a fifth of China’s emissions are for products consumed outside its borders, and although Europe emitted only 3.6 billion metric tons of CO2 in 2011, 4.8 billion metric tons of CO2 were created to make the products Europeans consumed in that year.  Such patterns are also evident from the global carbon import flows as measured by the World Economic Forum.

The easier way to bring emissions down is via RE procurement

Further, there is an argument that most of these emissions can be eliminated using cheap carbon abatement measures (e.g., energy efficiency and renewable energy) costing about $10/ton, with eventual impact to customers being less than 5%.

Recognizing this, many companies are working directly with their supply chain partners to green their electricity procurement, with the technology sector taking a leadership role. For example, Apple is working with 110 of its manufacturing partners to move to 100% renewable energy by 2030, consistent with net-zero in supply chains.

As a result of these actions, projected renewable energy growth in the APAC region from RE100 members (e.g., Microsoft, Google, Amazon, TSMC, etc.) in the technology sector from 61TWh today to 171TWh by 2030, mostly based on growth in manufacturing facilities and data centers in their supply chains.

Options include utility procurement, open access, and on-site generation

Going forward, in this note, we focus on China, given its outsized importance in global supply chains. However, many of learnings are relevant for the wider APAC region.

According to the World Resource Institute, there are three options for procuring renewable energy in China:

1. Invest in on-site distributed solar generation, either for full consumption, or for partial consumption plus feed-in the balance to the grid.
2. Direct purchase from a supplier: This has two further options from the generation perspective as the following.
   • One, centralized utility generation, via bilateral negotiations with suppliers, centralized bidding in a market that matches supply and demand, and listed transactions at sellers’ posted prices.
   • Two, distributed generation, via direct transactions involving purchase of power, commissioned transactions enabled by direct investments, and acquisition and distribution of existing assets.
3. Green energy certificates (GECs).

However, many barriers – cost, regulations, policy – exist in practice

However multiple barriers exist in practice for each of these procurement methods in China. These include the following: high cost of renewable energy, limited availability of renewable energy, complicated mechanisms for transactions, etc. The root causes include lack of consistent policies and regulations due to low policymaker priority.

For example, there is not enough support from local utilities in terms of wheeling fees that support renewable procurement, rules vary significantly across jurisdictions, and procurement is simply not possible in many situations. As a further example, absence of interprovince procurement makes it hard for companies in Southeast China – where much of the economic activity is based – to procure renewable energy from the Northwest regions despite significant curtailment.

Solutions would need to include policy, regulatory, and financial measures

While many fixes are proposed, they are preliminary at this stage. These can be further grouped under four categories, as follows: GECs, procurement, policy, and market. Each of these are further expanded below.

1. GECs: The idea would be to go beyond existing feed-in tariffs to auctions, allow all renewable energy to be eligible, be market-based, and allow for multiple-trades.
2. Procurement: The basic idea would be to standardize bilateral trades, market transactions, and retailers themselves.
3. Policy: The basic idea would be to move to one exchange, one certificate system, and one accounting system.
4. Market: The basic idea would be to enable public procurement, enable retail procurement, and ensure quality certification.

In this context, a lot can be learned by ongoing initiatives in the region as well as in China, as the following. First, Taiwan has mandated that large consumers, with greater than 5MW consumption, procure at least 10% of their electricity from renewable energy. Second, South Korea has revised its electricity act to allow for third-party power purchase agreements. Finally, China is experimenting directly with corporate power purchase agreements in Zhejiang and Guangdong provinces.

In fact, China is now moving quickly, by allowing companies in 17 out of 31 provinces to directly sign corporate power purchase agreements, which allow corporations to directly purchase renewable power from third parties, including distributed generation. This has resulted in corporate renewable power procurement quickly rising to 85.7 TWh year to date, with corporate power purchase agreements taking the lion’s share. This suggests increased focus on the corporate power purchase agreements going forward.

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Dr. Gireesh Shrimali is a fellow at the Initiative for Sustainable Energy Policy at Johns Hopkins University. He also teaches a course in Sustainable Energy Finance at the university.