More than ever before, market-leading companies are setting ambitious targets to reduce greenhouse gas emissions (GHG). Before sustainability goals were well-defined, companies tended to set GHG reduction targets based on public relations and internal approval processes. For many companies this resulted in short-term targets that were relatively easy to achieve. Following the historic Paris Agreement, companies across the globe are beginning to set targets based on climate science. For example, many companies are following the guidelines of the “2 degree pathway,” the limit of human-caused GHG emissions needed to hold average global temperature rise to 2°C. Achieving these new targets requires significant investment in projects to reduce emissions. This leaves many asking the question, “How much will we need to invest to achieve these new GHG targets?”
To answer this question, POINT380 analyzed data from 10,000 corporate investments in energy efficiency, fugitive emissions reduction, and renewable energy across seven industries. On average, companies reported investing $530 to reduce their annual emissions by 1 metric tonne of CO2e. Given these numbers, if a company sets a target to reduce emissions by 200,000 tCO2e between 2015 and 2020, it will likely need to invest $21m each year, or a total of $105m, to achieve that target. Even so, these average values do not tell the entire story. Significant variation exists in financial and environmental returns across industries.
Capital Investment by Industry
When comparing across seven different industry groups (Heavy Industry, Manufacturers, Information Technology, Retail, Transportation, Consumer Products, and Commercial & Professional), the capital cost of abating GHGs ranges from $345/tCO2e for Manufacturing to $1,057/tCO2e for Commercial & Professional. The driving factors in this wide range are the nature of operations and infrastructure in each industry.
For example, the emissions intensity in Manufacturing and Heavy Industry is many orders of magnitude greater than that of other industries. This provides abundant opportunities for industrial companies to curb emissions, often with a high emissions reduction per dollar of investment. On the other hand, Commercial & Professional companies such as banks and real estate firms operations generally produce much lower emissions, which results in smaller scale opportunities with lower environmental return on investment.
Financial Returns by Industry
While many still view sustainability programs as a cost center, the investment data reported by companies indicates that programs to reduce GHG emissions have been profitable. The annual average IRR (internal rate of return) for the 10,000 investments in this data set is 20%. However, the returns reported by industry vary significantly. Manufacturers on average earned a 36% IRR while Heavy Industry only earned a 14% IRR. This indicates that Manufacturers are finding many high financial return opportunities to reduce their emissions footprint, which could be due to the diversity of energy uses in manufacturing. Heavy Industry shows lower average financial returns because their investments tend to be large scale and long-term. Firms in Heavy Industry also tend to have long-standing programs to manage their energy footprint since it is typically a large percentage of their operating expenses. This means that many of the high return opportunities have already been implemented.
How Should You Use These Findings?
These findings provide a high-level view of what to expect when investing in emissions reduction projects. The exact costs, carbon savings, and financial returns for each project are driven by many factors: energy prices, facility energy systems, emissions associated with the electricity supply, utilization of energy systems, age of equipment, and many more. The values presented here are useful as a guide for company-wide strategic planning. This study also shows that the capital investment and returns associated with hitting GHG targets can vary significantly between companies and that a balanced portfolio of investments is necessary to achieve both financial and environmental goals.
