The De-Carb Diet

To comply with global climate targets, we have to reduce our carbon footprint – no ifs, ands, or buts. Nevertheless, there are a lot of challenges we need to face first.

Last year’s UN Climate Conference in Paris was truly a historic moment for mankind and its sustainable development: The key result of the COP 21 was an agreement to set a goal to limit global warming to less than 2 degrees Celsius compared to pre-industrial levels. In addition, the conference also identified the enemy we have to fight: carbon dioxide (C02) and all the other greenhouse gases that are – as a matter of routine – converted into CO2 equivalents. To comply with the 2-degree goal, we have to reduce carbon emissions to almost zero by the middle of the 21st century. So the magic buzzwords in blogs, speeches, and the rumor mills are “decarbonization” and the “low-carbon” – or even better, “zero-carbon” – economy. But to be honest, carbon is not a problem per se. It is the foundation of life on this planet. The aggregate state of carbon is the problem: When it takes the form of a fossil in the ground, it is completely unproblematic. As a greenhouse gas in the air, it causes global warming. This is where all carbon strategies come in.

Fossil fuel divestment. The Guardian offers a great explanation of this concept by writing: “The global movement for fossil fuel divestment is asking institutions to move their money out of oil, coal, and gas companies for both moral and financial reasons.” The concept arrived in mainstream thinking when the Rockefeller family said in March that they wanted to divest from fossil fuels as quickly as possible, including its holdings on ExxonMobil – the company that brought the Rockefellers their fabulous wealth.

Carbon taxation. An oversized carbon footprint is not just a problem of the explorative and energy industry. It can be found in all sectors of the economy. This is why experts say that we have to put a price on carbon. Lise Kingo, Director of the UN Global Compact, is one of them: “We believe that setting a $100 internal price on
carbon is one of the most effective ways to drive climate deep into corporate strategy and investment. While leading companies have taken steps to price carbon, we need to see an ascent in ambition and price across the board.”

Public regulation. It is obvious that self-regulation of the markets does not work in driving decarbonization into the right direction, at the right pace. This is why an increasing number of public authorities are imposing regulations: California, for example, has very strict legislation, as Volkswagen is learning the hard way. The European Union and China follow next. Other industrial sectors and more countries will be regulated to comply with the Paris Agreement. No one should hold any illusions.

So we are putting the world economy on a de-carb diet. Is everything going to be fine? The goal may be clear, but the road is rocky and there are many challenges ahead.

1. Challenge: Politics, or the temptation of the low-hanging fruit

The critical issue, in short, is not 2030 or 2050, but what happens afterward. Jeffrey Sachs, Guido Schmidt-Traum, and Jim Williams point out in a brilliant analysis that good intentions alone will not bring about true decarbonization. They argue: “There are reasons to worry. There are two paths to 2030. We might call the first path ‘deep decarbonization,’ meaning steps to 2030 that prepare the way for much deeper steps after that. The second path could be called the way of ‘low-hanging fruit’ – easy ways to reduce emissions modestly, quickly, and at relatively low cost. The first path might offer little low-hanging fruit; indeed, the low-hanging fruit can become a distraction or worse.”
What have we observed? Politicians around the world are fostering more-efficient power plants or mobility concepts and, true, they can improve their carbon footprints significantly. But these technologies might never be able to be geared toward a zero-carbon solution. But this is the long-term idea. Jeffrey Sachs reminds us that the easiest way is not the best. It is up to the politicians to explain this to their voters.

2. Challenge: Capital markets, or how to incentivize mature markets

The Climate Roadmap 2050 says that we have to reduce our carbon emissions by 80 to 95 percent. You cannot do this with the present stock of industry. You have to invest in new plants and industrial processes. In practice, this means the industry must be “zero-emissions ready” by 2040 to guarantee an efficient and economically predictable infrastructure by 2050. These deadlines are only one – maximum two – major investment opportunities away. But in many sectors, we do not see investment being made. It is not because interest rates are high – on the contrary: They are almost at zero. It is because the expectations for profits are low. The case of Japan offers insight: Aging societies are consuming less and they are prone to deflation, zero GDP growth, and decades of stagnation. China and Europe might join the Japanese track. So how can we offer incentives to invest in sustainable solutions in such mature markets?

3. Challenge: Entrepreneurship, or how to deal with immutable sectors

Max Åhman and colleagues from Lund University point to the fact that the prospects for decarbonization are still relatively unexplored in many industrial sectors. The reason is that industries are still sheltered by their governments to protect jobs in spite of lost competitiveness. And when we talk about decarbonization or about imposing carbon taxes and regulations, we have to be honest and say that there will be losers. Refineries, for example, will have less importance – or even none at all. The chemical sector, relying on refinery byproducts, must also change fundamentally toward bio-based chemicals to find its place in the post-carbon economy. Look at the steel industry: There is no steel without coking, and there is no coking without carbon emissions. Abstaining from steel is not an option. In fact, a decarbonizing economy will have a growing demand for steel for new, sustainable industrial sites. This is a true challenge for zero-carbon entrepreneurs.

4. Challenge: Growth of population, or the dilemma with the backlog demand

There are many smart studies on the market calculating the effect of this or that measure. I am confident that they are correct. The challenge is not only to manage the already existing market but also to meet new demands in a sustainable way. Europe, for example, is enthusiastically developing a renewable-energy sector. So are we finally reducing our dependency on fossil energies? No, we are not. The US Energy Information Administration’s recently released International Energy Outlook 2016 projects that world energy consumption will grow by 48 percent between 2012 and 2040. Most of this growth will come from countries that are not in the Organisation for Economic Co-operation and Development (OECD), including countries where demand is driven by strong economic growth, particularly in Asia. Non-OECD Asian countries, including China and India, account for more than half of the world’s total increase in energy consumption over the projection period. Concerns about the energy security issues generated by renewables support the expanding use of fossil energy sources and nuclear power. There is nothing new about the dilemma with the backlog demand. We are still waiting for someone to offer a smart answer.

Measures to take

- Honestly, a lot of expectations depend on disruptive innovations in the future. New players, new products, and new ideas will stir up the markets.
- We have to use limited resources more intelligently: The circular and shared economies have shown us new business models that address this aspect.
- Efficiency is not only a topic for engineers and graduates in business administration. It is foremost a topic for product designers and product developers. We have to form a new aesthetic that shows how cool it is to buy without packaging, to shop without plastic bags, and to live without disposables.
- We will need a holistic calculation of costs. It is too simple to calculate a price without taking into account the up- and downstream supply chains. Sport shoe manufacturer Puma is a good example for showing us the way companies can do it. I do not know if this holistic calculation of costs must have an effect on the price itself, but it will have an effect on transparency and awareness-building. Such a holistic concept of costs, by the way, corresponds with the holistic concept of capital that the International Integrated Reporting Council is discussing.
- Politicians will have to write the regulations. Global solutions are desirable but not obligatory. It is erroneous to believe that there is no alternative to globalization. National, or even regional regulations show us that there is always an alternative and competition is the way to improve systems. See how California emissions legislation is breathing fire into the belly of the EU administration.

None of these descriptions offers a concrete, one-step solution for practitioners. This is up to you. You have to realize that corporate sustainability is a compass, not a map.