Navigant Research Blog

Finding a Cost-Effective Path to Climate Leadership

— January 9, 2018

A new wave of climate change regulations is coming, and this time to all corners of the world. Following the Paris Agreement, more than 80% of countries have already drawn up plans on how to contribute to the low carbon transition. Some have realised plans that put a price on greenhouse gas (GHG) emissions. While the majority still have to translate those into concrete regulations, the uncertain timing and cost effects of these regulations create risks for businesses.

Internal carbon pricing (ICP) can help companies navigate the tentative regulatory waters. Assigning an internal price to their carbon footprint enables companies to translate future effects of climate change regulations into a monetary metric. This allows decision makers to compare climate measures on equal financial terms and implement the most cost-effective ones. Already, almost 1,400 companies—including more than 100 Fortune Global 500 companies, representing about $7 trillion in annual revenue—have reported to CDP that they are using an ICP, or plan to do so in the coming 2 years. Most companies use ICP to manage exposure to climate-related risks, while a smaller subset uses it for scenario analysis of these risks, as recommended by the Financial Stability Board Taskforce on Climate-related Financial Disclosures. Only a few progressive companies try to utilise the full potential of ICP to find the cheapest measures to prepare for regulatory risks, discover new revenue opportunities, and reduce their carbon footprints.

Framework for Best Practice ICP

Source: Ecofys, a Navigant Company

Ecofys, a Navigant company, The Generation Foundation, and CDP developed a new 4D framework to help companies find the most cost-effective way forward in the low carbon transition as follows:

  • Have a carbon price level capable of affecting decisions (Height). Saint-Gobain uses two carbon prices, one for capital expenditure decisions and a higher price to stimulate R&D in disruptive low carbon technology.
  • Cover the GHG emissions hotspots in the value chain that can be influenced (Width). Carrefour decided to use ICP on GHG emissions related to energy use from its stores, which covers 90% of emissions it could directly influence.
  • Integrate it into business decisions (Depth). DSM has integrated ICP in existing business processes and has made it a mandatory factor in the financials for large investment decisions.
  • Evaluate regularly in line with business strategy (Time). Danone updated its ICP in 2016 to align it with its target to achieve carbon neutrality by 2050.

Three Success Factors to Setting Up an ICP Approach

With each dimension affecting the next, companies will have to decide between tradeoffs of acceptability, accuracy, administrative burden, and effect. Optimal combinations of model will vary depending on goals, GHG emissions profiles, influence in the value chain, and company culture. Nonetheless, three overarching success factors were identified for setting up a best practice ICP approach:

1. Obtain board-level support early on. The CFO and other strategy directors are especially important because well implemented ICP will influence financial decisions.

2. Engage the organisation from the start. Take the affected teams on board to create a sense of ownership and improve internal buy-in.

3.Start simple and learn by doing. Try embedding it in daily decisions. Over time, you can gradually increase the effect of ICP in the decision-making process.

Building on industry interviews and public consultation, Ecofys, a Navigant company, the Generation Foundation, and CDP published a guide detailing a four-step approach to establish a best practice ICP. Accompanied by a C-suite guide for executives, it allows companies to identify the most promising ICP approach for their organisation. Using ICP in a best practice way helps to actually ride the wave of new climate change regulations, not be overwhelmed by them.

 

Indirect Land Use Change from Biofuels Explained

— December 27, 2017

Full decarbonisation of transport will be hard without biofuels, but sustainability concerns have made policymakers weary of stimulating crop-based biofuels. The debate on the indirect impacts from biofuels in particular has increased recently. For example, on December 2, 2017, a group of Dutch scientists called on the Dutch cabinet to stop the use of food crops for biofuels. The lead argument refers to the GLOBIOM report, though it mainly follows the interpretation by the non-governmental organization Transport & Environment.

What Is ILUC?

Indirect land use change, or ILUC, is the rippling effect that an increasing demand for biofuels feedstock can have on global agriculture. This could lead to land expansion and deforestation elsewhere, with the subsequent effect of increased CO2 emissions.

ILUC is not measurable, as it takes place via complex economic interactions and is manifested only in small variations in the large dynamics of the global agriculture system. It can only be analysed through detailed modelling. In 2015 and 2016, the European Commission contracted Ecofys, a Navigant company, and the International Legal Alliance Summit & Awards (IIASA) to assess ILUC with the GLOBIOM model.

What Do We Know About ILUC?

From this study, we see that ILUC effects depends on the type of biofuels crop, among other factors:

  • ILUC impacts from sugar- and starch-based ethanol are small. The contribution of these types of biofuels can be increased without ILUC risks.
  • The same holds for wood- and straw-based biofuels.
  • Higher ILUC values are found for European oil crop-based biofuels, but ILUC is paid back within a few years by the savings resulting from replacing fossil fuels.
  • ILUC emissions are very large for soybean and palm oil. It is advised to decrease the volumes of biofuels based on these crops unless they are produced (certified) without ILUC.

It is crucial to be aware of the ultimate sources of ILUC emissions in tropical countries: mainly deforestation and peatland drainage caused by sectors that are not held accountable to EU biofuels standards. Top policy priority should therefore be to stop deforestation (globally) and agricultural expansion into peatland (mainly in Indonesia).

How to Avoid ILUC

From the biofuels production perspective, ILUC can be avoided in several practical ways:

  • Produce additional crops on abandoned agricultural or degraded land so that it does not interfere with normal crop production.
  • Use investments in biofuels to innovate in agriculture, to sustainably increase EU yields, and to bridge yield gaps in developing countries.
  • Produce additional crops within the current agricultural land; for example, through sequential cropping.

What Does This Mean for Biofuels in General?

It is important to remember that crop-based biofuels can contribute to the greening of transport in a sustainable way. The ILUC concept should not be used to categorically decrease their contribution. Other aspects should be considered in addition to ILUC. Specific considerations can put impacts in perspective and certain solutions can make the challenges manageable. This does not mean we should give carte blanche to increasing the levels of any and all biofuels. But it is possible to govern the sustainability performance and limit the ILUC impact. A generic call for the phaseout of all crop-based biofuels is ultimately counterproductive in the fight against climate change.

 

Cities: The Focal Point of Climate Action

— November 17, 2017

This blog post was written by Richard Boehnke.

Cities are a focal point of climate action, both individually and as signatories to large networks dedicated to climate mitigation (e.g., Covenant of Mayors and C40). However, efforts to pledge support, sign an agreement, and publish a local climate strategy with an emissions target do not equate to implementing meaningful climate action. Little data is available to support whether cities are on track to achieving targets or if their targets can be met. For example, with the Netherlands reporting only a 3.8% emissions reduction between 2010 and 2015, municipal governments will be required to take the lead in climate action. Yet, with limited budget and staff working on mitigation, most municipalities are also falling behind on individual climate targets. Ecofys, a Navigant company, investigated which existing best practices could be used by local governments to work towards achieving climate goals.

Opportunities for Local Governments: Best Practices in Climate Action

The study examined 26 best practices from 13 Dutch municipalities. These ranged from community energy ambassadors in Almere, to an energy coalition in Den Bosch, to the investment scheme that led to the construction of large wind turbines in Nijmegen. Civil servants stated the goal of these practices was to act as facilitator, engaging the public and businesses to mediate regulatory and institutional processes. However, more needs to be done to meet ambitious targets.

The First Missing Piece: Collaboration

Listening to other departments’ targets and collaborating on projects is crucial to developing citywide climate solutions. Climate projects typically involve several aspects of city development and are frequently cut due to varying priorities when considering the expense of a specific climate measure. It is possible to use mitigation actions to achieve municipal targets because of the broad impact these actions can have beyond reducing CO2 emissions, like air quality improvement or job creation. Achieving climate targets can be considered a co-benefit when conducting successful and profitable municipal projects.

The Second Missing Piece: Monitoring

Databases like the Klimaatmonitor—which contains key energy and climate statistics for Dutch municipalities—are extremely useful for overviews of municipal progress and national trends. However, there are no clear data or monitoring schemes of local climate projects. This gap limits decision makers because the effects of any given project are not known. Without this data, pilots are less likely to be scaled, best practices are difficult to develop and replicate, and real-time progress cannot be assessed.

A Way Forward

Clear, actionable climate plans are necessary to realize the potential of local climate action. Local governments lack public short- and long-term plans in areas where emissions will be locked in (e.g., district vs. electric heating, hydrogen vs. e-transport, in-depth vs. cursory building renovations). There are several tradeoffs when considering each of these paths, but inaction will only delay the inevitable choice and reduce related short- and mid-term benefits. Robust climate plans require:

  • Emissions targets
  • Emissions baseline
  • Budget
  • Stakeholders
  • Clear measures
  • An implementation plan and timeline
  • A monitoring scheme

If full-bodied plans are implemented, municipalities can share each step of their projects and monitor progress towards achieving local climate goals. With public long-term planning, citizens, cooperatives, and businesses can participate, invest in, and adapt to the municipal energy transition. Municipalities will have to invest a lot more than the currently allocated budgets and manpower to become climate neutral in 20-30 years.

Research conducted for the municipality of Utrecht (350,000 inhabitants) shows that if all measures were realized within the city limits, becoming climate neutral would require investments of about €9.5 billion. However, if the municipality agreed to take part of its investments outside of Utrecht (e.g., funding offshore wind in the North Sea), total investments could be reduced to roughly €4 billion. Ecofys, a Navigant company, proposes that national and municipal governments should agree on a fair effort sharing to reduce overall societal costs.

For more information, please get in touch with our team.

 

Postcard from Hawaii to Nation’s Capital

— June 29, 2017

The mood at the second annual VERGE conference in Honolulu, Hawaii last week was upbeat about the future of clean energy, despite pushback on the US mainland. Apparently, those committed to a clean energy agenda, including the private sector, are more motivated than ever to push forward with aggressive programs to bring renewables resources online. They aim to not only combat climate change, but also create jobs.

Conference attendees clearly supported the supposition that clean energy is here to stay, no matter what might be unfolding in Washington, DC. The proposed dismantling of the federal Environmental Protection Agency’s Clean Power Plan and recent withdrawal of the United States from the Paris Agreement on climate change only seemed to serve as motivation to push forward even harder.

Hawaii’s Renewable Energy Vision

Hawaii is the first (and so far) only state in the United States to commit to a 100% renewable energy future. Governor David Ige of Hawaii didn’t seem to blink in the face of counter currents flowing from the Trump administration. A confessed energy geek, he seemed to take particular delight in the fact that Hawaii has emerged as a key testing ground for bolstering commitments to infrastructure needed to integrate variable renewables for both power and transportation services. Since each island of Hawaii is its own separate electric grid control area and retail costs are high due to such a reliance upon imported sources of fossil fuel, Hawaii is in a unique spot. The economics in the state clearly favor renewable energy.

Industry Momentum Is for Renewables

Even Connie Lau, CEO of Hawaiian Electric Industries, reported that her investor-owned utilities brethren have all bought into the clean energy agenda. If the administrative about-face on clean energy had occurred 8 years ago, then the momentum for renewables and other clean energy may have been halted, but that time has passed. Past government and industry investments have driven down the price of solar PV, wind, and batteries while software innovation to manage such resources has scaled up.

Nevertheless, there are challenges in implementing aggressive clean energy goals. Just look at California, where the state is paying neighboring states to take excess solar production. Many models show that once one reaches 80%-90% renewables penetration, the cost of integration can jump dramatically.

One of the key tools Hawaii will rely upon to reach its 100% renewable energy goal is to integrate devices like energy storage into self-balancing distribution networks such as microgrids. As of now, over 90 MW of new energy storage devices has been authorized by state regulators to be installed among the Hawaiian islands, with the majority of that capacity—70 MW—to be installed in Oahu.

Continuing Conversation

I had the pleasure of helping to run a 4-hour workshop on how to overcome challenges to developing a microgrid at VERGE with cutting edge microgrid market makers such as ENGIE and Spirae. I also moderated a session on how microgrids boost clean energy on islands, with featured speakers from ABB—which is pushing forward with a 134 MW microgrid designed to reach 50% renewable energy on the island of Aruba by 2020—and representatives from Hawaii and the US Navy.

Ironically, there may still be some room for collaboration between Hawaii and Washington, DC in the clean energy space. As I noted in a previous in a previous blog, one area where the interests in promoting national security in DC and a clean energy agenda in Hawaii align is the microgrid space. Watch for a report on that topic later this year.

 

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