Science-based methodology to set 2 C GHG emissions targets for companies

Mind the Science: Science-based methodology to set 2 C GHG emissions targets for companies EXECUTIVE SUMMARY Draft version Date: 22 May 2014 Authors: Giel Linthorst, g.linthorst@ecofys.com Kornelis Blok, k.blok@ecofys.com Introduction The present work describes a target-setting methodology for companies to reduce greenhouse gas emissions in line with the latest scientific scenario that would limit global temperature rise to 2 C. The methodology presented here is part of a larger initiative, Mind the Science, Mind the Gap, led by CDP (formerly the Carbon Disclosure Project), the World Resources Institute (WRI), and World Wide Fund for Nature (WWF). The objective of Mind the Science, Mind the Gap is to provide scientificallyinformed guidance for companies through several tools seeking to raise the level of ambition on corporate target-setting methods and drive bolder solutions by identifying and promoting innovative approaches to GHG target setting. Ultimately, the leading organisations plan to engage with the business sector in the adoption of these methods to ensure that the greatest number of companies commit to reduce their carbon footprint, recognizing the urgency of the climate science. In the next pages, an executive summary of the draft methodology is offered to help the reader grasp the general grounds of this approach. Mind the Science methodology 1/13

Growing GHG emissions call for action From 1970 to 2010, global anthropogenic greenhouse gas (GHG) emissions increased from approximately 27 to 49 GtCO 2 eq per year, despite reduction efforts. Most GHG emissions growth resulted from fossil fuel combustion and industrial processes. Figure 1. Total global annual anthropogenic GHG emissions by group of gases 1970-2010 (IPCC, 2014) Of the 49 GtCO 2 eq in 2010, 35% (17 GtCO 2 eq) were released in the energy supply sector, 24% (12 GtCO 2 eq) in Agriculture, Forestry and Other Land Use (AFOLU), 21% (10 GtCO 2 eq) in industry, 14% (7.0 GtCO 2 eq) in transport and 6% (3.2 GtCO 2 eq) in buildings. When GHG emissions from electricity and heat production are attributed to the sectors that use the final energy (i.e. indirect emissions), the shares of the industry and buildings sectors in global GHG emissions are increased to 31% and 19% (IPCC, 2014a), see Figure 2. Mind the Science methodology 2/13

Figure 2: Share of global direct and indirect emissions in 2010 by economic sectors (IPCC, 2014) Without additional efforts global GHG emissions will increase and will result, according to IPCC, in an increase of global temperatures of 3.7 to 4.8 C (IPCC, 2014a). To prevent the most severe impacts of climate change, parties to the United Nations Framework Convention on Climate Change (UNFCCC) agreed in 2010 to commit to a maximum temperature rise of 2 C above pre-industrial levels (UNFCCC, 2011). Significant reductions in global GHG emissions are needed to achieve this target. In a joint effort, CDP, WRI (World Resources Institute) and WWF (World Wide Fund for Nature) launched the initiative Mind the Science, Mind the Gap to develop guidance for companies to set science-based targets to reduce GHG emissions in line with a 2 C decarbonisation pathway. Ecofys was selected as technical partner to support the development of the methodology and tool for this guidance. Reading guide This executive summary provides details on the Mind the Science methodology. It starts by defining a 2 C decarbonisation pathway, followed by an overview of existing target setting methodologies. Then, the methodological principles for the Mind the Science methodology are provided, which are followed by the step-by-step methodological approach. At the end, the benefits and limitations of the methodology are shown in one concise table. References can be found at the end of the paper. Mind the Science methodology 3/13

Global 2 C decarbonisation pathway The development of the methodology started with defining and assessing the appropriate 2 C decarbonisation pathway. Mitigation scenarios to stay below 2 C are characterized by atmospheric concentrations in 2100 of about 450 parts per million (ppm) CO 2 eq (IPCC, 2014a). In their 5 th Assessment Report (AR5), the Intergovernmental Panel on Climate Change (IPCC) assessed a large number of GHG emission scenarios published in the scientific literature. The Representative Concentration Pathways (RCP) is the latest generation of scenarios that provide input to climate models. Of the RCPs, the RCP2.6 scenario gives the highest likelihood (probability of 66-100%) to reach 450 ppm CO 2 eq and thus to keep the average global temperature rise below 2 C in 2100, see Figure 3. Figure 3: Pathways of global GHG emissions (GtCO 2eq/yr) (IPCC, 2014) IPCC AR5 Working Group III recently published its report on Mitigation of Climate Change. In this report 2 C mitigation scenarios for the sectors Energy Systems, Transport, Buildings, Industry and Agriculture, Forestry and Other Land Use (AFOLU) are assessed. This report is seen as the current status of science and is thus used as basis for the development of the Mind the Science methodology. For the sector Industry, most scenarios are not detailed enough. Therefore, we used, following the IPCC AR5 Working Group III, the detailed emission scenarios that the International Energy Agency (IEA) has created in their 2012 Energy Technology Perspectives (ETP) report. The 2 C mitigation scenario (2 degree scenario 2DS) is consistent with the RCP2.6 scenario and has a breakdown in several industrial sectors, which makes it a very useful additional source for setting GHG emissions targets for companies in different sectors (Schaeffer & Van Vuuren, 2012). Existing methodologies for developing the Mind the Science methodology In the past, several 2 C target setting methodologies have been developed by scientists, NGOs and companies and they have constituted the starting point for developing the Mind the Science methodology. The following existing methodologies or applications were found and assessed: GEVA (GHG emissions per value added) developed by Jørgen Randers, a climate strategist from the Norwegian Business School (Randers, 2012). It uses value added as a measure, Mind the Science methodology 4/13

estimates future economic growth and uses an approach based on intensity of scope 1 emissions per value added, differentiating between developing and developed countries. British Telecom (Chris Tuppen) used the GEVA-approach to develop their target-setting methodology (called Climate Stabilization Intensity (CSI) Target). The CSI-approach is based on a scope 1+2 carbon intensity per value added. In order to meet the 80% reduction target in 2050, and assuming a global annual GDP growth rate of 5.9%, this intensity is supposed to be reduced by 9.6% annually (Tuppen, 2009). Center for Sustainable Organizations (CSO) developed a context-based approach on allocating future emissions based on the base year emissions from a company. The CSO metric measures scope 1+2 emissions per dollar of contribution to GDP ($CGDP) against normative or science-based thresholds (e.g. 350 ppm) (CSO, 2014). C-FACT, developed by Emma Stewart and Aniruddha Deodhar, at Autodesk, also based on value added (gross profits) and also calculated intensity in 2050, considering expected growth and a reduction of 85% of GHG emissions. ICT company EMC used the C-FACT method to determine their emission reduction target. However, where the C-FACT method reduces carbon intensity with the same percentage each year, the EMC method uses a different path to reach the same 80% reduction in 2050. WWF US and CDP develop a methodology for companies in the US in their 3% solution report, to calculate a 2020 GHG emissions target. A sectoral approach is used to determine sector reduction opportunities and sector emissions change projections. These are then used to calculate an emissions target for a company based on its current emissions and its growth ambition (CDP & WWF, 2013). Ford developed a methodology for setting their targets in line with limiting the concentration of CO 2 eq to 450 ppm. Ford s methodology is based on analysis with the global energy transition model (Grahn, Klampfl, Whalen, & Wallington, 2013). Using that model, carbon intensity glide paths are constructed up to 2030, that calculate the amount of light-duty vehicle (LDV) CO 2- emissions; Mars set their climate targets to be in line with what the IPCC agreed to be necessary to keep global warming below 2 C 80% reduction up to 2050 compared to baseline year in 2007 for emissions within their direct operations; Above existing methodologies and their characteristics are assessed on various criteria, like scope, target type (intensity/absolute), timeframe, historical responsibility, sector discrimination, regional differentiation and applicability. Key findings from this assessment are: Methodologies based on added value are valuable for especially heterogeneous sectors and require limited data availability. Added value data can be derived from corporate accounting reports (at corporate level) or from (inter)national statistics (at sector level), although different definitions of added value in the existing methodologies (as proxy for contribution to GDP) are used. The existing methodologies (except Ford s and WWF US & CDP) use more generic, global GHG reduction and are thus not taking sectoral differences in abatement potential into account. The existing methodologies use various timeframes: 2020, 2030 or 2050. The existing methodologies (except Ford s) do not make use of existing scientific climate scenarios and integrated assessment models. Mind the Science methodology 5/13

The existing methodologies do not take historical responsibility into account or current differences in carbon performance of companies. The existing methodologies differ in their coverage of scope 1, 2 and 3 and there is limited distinction between the different scopes (1, 2 and 3) Methodological principles set the basis for Mind the Science methodology Based on these key findings of the existing methodologies, the following main principles were defined to design the Mind the Science methodology: The methodology is based on established science, i.e. recent publication of IPCC Working Group III on Mitigation of Climate Change (IPCC, 2014a) and IEA Energy Technology Perspective 2 degree scenario (2DS) (IEA, 2012a). The methodology uses physical units as activity indicators for homogenous sectors (e.g. tonne of steel), since the correlation between output of a company (physical units) and corporate GHG emissions is stronger than monetary indicators and these sectors are used to account and report based on physical indicators. For heterogeneous sectors or in case of lack of data, a monetary indicators ($ value added) will be used (like in many of the existing methodologies). This is broadly in line with the existing practices of companies; The methodology allows for flexibility in achieving GHG emissions reductions, it does not dictate the location where the reductions have to take place, nor the technologies that have to be used nor the timing of the reduction measures. This allows companies to select the most cost effective emission reduction options and to match their climate protection strategy to their investment cycle; For homogenous sectors the methodology takes into account the existing carbon intensity performance of a company and does not penalise early movers; The methodology is based on publicly available data; The methodology targets absolute GHG emissions reductions based on interim carbon intensity measures; The methodology is flexible to set GHG emissions targets for any year up to 2050. Methodological approach The Mind the Science methodology was developed in a three-step approach, resulting in three methods for target-setting. Based on these steps and methods for target-setting, an accompanying Excel-tool is also being developed. Step 1. Scoping The global GHG emissions in 2010 (49 GtCO 2 eq), divided in six economic sectors by IPCC (Figure 2), are broken down in more detail using several data sources, see Figure 4 middle bar Detailed sector breakdown. IPCC AR5 WGIII Mitigation of Climate Change and IEA ETP 2012 are assessed in detail to identify specific science-based 2 C decarbonisation scenarios per sector. If a sector has a detailed science-based 2 C decarbonisation pathway and the data on GHG reduction and activity growth (growth of physical unit of production or GDP) towards 2050 of these pathway is available, then these sectors are included in the Mind the Science methodology, see Figure 4 right bar Currently covered by Mind the Science. In total over 60% of the global GHG emissions in 2010 are currently covered by the Mind the Science methodology. Mind the Science methodology 6/13

49 GtCO 2 eq Figure 4. Scope of Mind the Science methodology (data sources: IPCC 2014, IEA 2012 CO 2 emissions database & Energy Balance, JRC Global Emissions EDGAR v4.2, CDIAC Preliminary CO 2 Emissions 2011, Global Carbon Project 2012) Due to lack of science-based 2 C decarbonisation scenarios, two IPCC sectors are not covered yet, i.e. sectors Other energy (including coal mining, oil & gas extraction, refining and processing and energy industry own use & losses) and AFOLU (including agriculture soil, agriculture and land use change). Step 2. Sector pathways The data of the science-based 2 C decarbonisation scenarios from IPCC AR5 WGIII on Mitigation of Climate Change (IPCC, 2014a) and IEA ETP 2DS (IEA, 2012a) are used to construct the specific 2 C decarbonisation pathway per sector. This pathway is primarily determined by two factors: 1) GHG emissions reduction and 2) activity growth (physical unit of production or GDP) from 2010 to 2050. The pathway of each sector is determined by the development of the carbon intensity of the sector, i.e. GHG emissions divided by activity growth from 2010 to 2050. For homogeneous sectors physical carbon intensity indicators are used and for heterogeneous sectors monetary carbon intensity indicators ($ added value as contribution to GDP). In case of lack of a specific science-based 2 C decarbonisation scenario or lack of data, a more generic approach (similar to the existing Mind the Science methodology 7/13

methodologies based on added value) is used based on a monetary carbon intensity indicator ($ added value as contribution to GDP). Figure 5 shows these three methods for target-setting. More detail on these methods is provided on the next pages. Step 3. Test phase Test and improve the Mind the Science methodology on three case studies. Figure 5. Decision tree resulting in three different methods Method I: Physical IPCC Working Group III on Mitigation of Climate Change (IPCC, 2014a) and IEA ETP 2DS (IEA, 2012a) provide detailed sector scenarios including data (both GHG emissions and physical activity growth up to 2050) for the sectors Power, Cement, Iron & Steel, Aluminium, Pulp & Paper, Aviation, Automotive use and Commercial buildings. In this method I these scenarios and data are used to determine the sector physical carbon intensity pathway towards 2050. Table 1 shows the eight sectors that are given a GHG emissions target using method I. For example, for the commercial buildings sector, the carbon intensity in 2010 was calculated by dividing the total amount of GHG emissions from commercial buildings in 2010 by the total floor space in 2010. In order to calculate the carbon intensity for 2050, the total sector GHG emissions and the expected amount of commercial buildings floor space in a 2 C scenario for 2050 were taken from the IEA ETP 2DS. This method was also used to calculate the carbon intensity pathway for scope 1 emissions for the others sectors covered by this method. Data of intermediate years (like 2020, 2030 and 2040) were used as well, if available. Mind the Science methodology 8/13

For the scope 2 emissions, the detailed sector scenarios provide future electricity use per sector (excludes purchased heat and steam). These are divided by the future production to get the electricity intensity (in kwh/ tonne of product). This intensity is then multiplied with the future carbon intensity of electricity (which is equal to the power sector scope 1 pathway) to calculate scope 2 intensity pathways. Table 1. Physical carbon intensity pathways for sectors with detailed science-based sector scenarios # Sector Intensity Carbon intensity 2010 Carbon intensity 2050 indicator scope 1 scope 2 scope 1 scope 2 1 Power generation gco2/kwh 553.2 10.7 2 Cement tco2/t cement 0.7 0.1 0.4 0.0 3 Iron and steel tco2/t crude steel 1.8 0.4 0.7 0.0 4 Pulp and paper tco2/t paper 0.6 0.7 0.2 0.0 5 Aluminium tco2/t aluminium 2.6 5.6 1.6 0.1 6 Automotive use gco2/pkm 213.3 67.8 7 Aviation gco2/pkm 151.7 45.9 8 Commercial buildings kgco2/m2 24.3 0.1 12.9 0.0 In the Mind the Science methodology it s assumed that the companies physical carbon intensity (scope 1 and scope 2) converges to the 2050 sector carbon intensity. Figure 6 indicates how this convergence works out for company A and company B with higher and lower carbon intensity than the sector carbon intensity in 2010. Figure 6. Physical carbon intensity (CI) of Company A and B converging to sector physical carbon intensity in 2050 Method II: Added value IEA ETP 2DS (IEA, 2012a) provide a detailed sector GHG emissions reduction scenario for the sector Chemical and Petrochemical as well. However since this sector is heterogeneous, the GHG emissions per $ added value is used as carbon intensity indicator. The companies scope 1 carbon intensity and scope 2 carbon intensity towards 2050 is based on the GHG emissions reduction in this detailed scenario for the sector, corrected for average 3.3% economic growth. Table 2 shows the absolute GHG reduction on scope 1 and 2 that are used in this method II. Mind the Science methodology 9/13

Table 2. Absolute GHG emissions reduction for Chemicals and Petrochemicals based on detailed science-based sector scenario GHG emissions # Sector 2050 vs 2010 scope 1 scope 2 9 Chemicals and petrochemicals -19% -97% Method III: Added value All other sectors that are not detailed in science-based decarbonisation scenarios or lack global data are covered by the existing methodologies based on added value. The companies scope 1 and scope 2 GHG emissions targets per $ added value are based on an absolute GHG reduction corrected for average 3.3% economic growth. Based on the data from IEA ETP 2DS (IEA, 2012a) different absolute GHG reduction on scope 1 and 2 are defined for industry and transport companies, see Table 3. Table 3. Absolute GHG emissions reduction for all other sectors included in the Mind the Science methodology GHG emissions # Sector 2050 vs 2010 scope 1 scope 2 10 Other industry -16% -96% 11 Other transport -17% -84% Application of the methodology: case study The methodology is tested in three case studies. One of them is a steel company. As case is assumed that this steel company wants to set a science-based GHG emissions target in 2030 by using Method I Physical methodology. Below this case study is presented in four steps. 1. The steel company selects 2012 as base year and 2030 as target year. In this base year the company produce 44 Mtonne (Mt) crude steel and has 79 Mt CO 2 eq scope 1 emissions and 8.5 Mt CO 2 eq scope 2 emissions. The steel company expects an activity growth of 2% per year towards 2030. Table 4. Input data case study steel company Input Value Unit Base year 2012 Target year 2030 Base year scope 1 emissions 79 MtCO 2eq Base year scope 2 emissions 8.5 MtCO 2eq Base year activity 44 Mt crude steel Activity growth projection 2% per year 2. The company s carbon intensity for scopes 1 and 2 are calculated. In this case the carbon intensities are 1.8 tco 2 eq/t crude steel for scope 1 and 0.1 tco 2 eq/t crude steel for scope 2. 3. The company s carbon intensity pathway is created by linearly decreasing the difference between the company carbon intensity and the sector carbon intensity required for limiting climate change to 2 C. Figure 7 shows the sector intensity pathway and the company intensity pathway for scopes 1 and 2. This results in a company scope 1 intensity in 2030 of 1.1 tco 2 eq/t crude steel and a company scope 2 intensity in 2030 of 0.1 tco 2 eq/t crude steel. Mind the Science methodology 10/13

Target year Target year Figure 7. Carbon intensity pathway for scope 1 and scope 2 of steel company in case study 4. Using this company s carbon intensity pathway and the activity growth projections, the absolute GHG emissions targets can be calculated for the company. The companies scope 1+2 GHG emissions targets in 2030 are -15% below 2012 levels, while the production has increased by 43%. Benefits and limitations of the Mind the Science methodology Table 4 shows benefits and limitations of the methodology. Table 4: Overview of the benefits and limitations of the Mind the Science methodology Characteristic Benefit Limitation The potential development of the carbon intensity is used as interim calculation products to set absolute GHG emissions targets. Sectors are treated uniformly, without taking into account structural differences between companies. It is assumed that the physical carbon intensity of companies converges to a sector average in 2050. The number of sectors is limited. - By using a carbon intensity indicator, the company is allowed to grow, as long as its emissions and that of the sector per unit of activity decline to the desired level. - Using a carbon intensity doesn t penalize early movers, since there reduction pathway is less steep. The method stays practical and easy to use. Differences between companies cannot be used as an excuse to set a less ambitious target. All homogenous companies within a sector, no matter where they operate, can have the same 2050 target. It is assumed that regional carbon intensities will converge towards 2050. The methodology currently covers a distinct number of carbon-intensive sectors. A sector Other industry and Other transport has been introduced that can be used by companies with activities in a sector that is not currently covered. Data on both emissions and activity are needed, for the base year and as a projection in a 2 C pathway. Not all sectors are covered with a 2 C pathway. The methodology may be too high level. There are limitations to the applicability of the targets within sectors, such as product mix and other structural parameters that are not taken into account. Convergence is an assumption used e.g. in the IEA scenarios. There may be a dispute whether this does justice on the equity principle formulated in the UN Climate Convention. Not all sectors are covered by detailed science-based 2 C scenarios. The targets for the companies with activities not covered by 2 C scenarios (i.e. Other industry and Other transport) are less specific. Mind the Science methodology 11/13

Scope 1, 2 and 3. Companies with activities in more than one sector. Companies can set targets for mainly scope 1 and 2 and use the methodology to set targets for scope 3 GHG emissions upstream if these emissions are caused by suppliers that are part of sectors currently covered by the methodology. Companies with activities in more than one sector can allocate emissions to more sectors. These companies can set GHG emission targets per sector and aggregate these targets to a company target (per scope). Not all scope 3 emission categories are included in the methodology due to limited data availability (CDP, 2013). To make the methodology practical, corporate GHG emissions can be allocated to max 3 sectors. This restriction is arbitrary. Call for feedback This draft version of the Mind the Science methodology is open for feedback. WWF, WRI and CDP have invited stakeholders to one-day workshops to learn about and provide input on this methodology. These workshops are part of a larger public consultation process that is opening for companies to share useful insights for the improvement of the methodology. Mind the Science methodology 12/13

References CDP, & WWF. (2013). The 3% solution: Driving Profits Through Carbon Reduction. CSO. (2014). Frequently Asked Questions About CSO s Context-Based Carbon Metric. Retrieved from http://www.sustainableorganizations.org/carbon-metric-faqs.pdf IEA. (2012a). IEA Energy Technology Perspectives 2012. IPCC. (2014). Working Group I - Fifth Assessment Report. IPCC. (2014a). Working Group III - Fifth Assessment Report. Retrieved from http://mitigation2014.org/report/final-draft/ OECD. (2012). OECD Environmental Outlook to 2050 - The Consequences of Inaction. Randers, J. (2012). Greenhouse gas emissions per unit of value added ( GEVA ) A corporate guide to voluntary climate action. Energy Policy, 48, 46 55. doi:10.1016/j.enpol.2012.04.041 Schaeffer, M., & Van Vuuren, D. P. (2012). Evaluation of IEA ETP 2012 emission scenarios - Climate Analytics Working Paper 2012-1 (Vol. 49, pp. 1 10). Tuppen, C. (2009). Climate Stabilisation Intensity Targets: A new approach to setting corporate climate change targets. Retrieved from http://advancingsustainability.com/documents/csi_methodology.pdf UNFCCC. (2011). Report of the Conference of the Parties, on its sixteenth session, held in Cancun from 29 November to 10 December 2010 - Decision 1/CP.16. FCCC/CP/2010/7/Add.1, 1 31. Mind the Science methodology 13/13