By how much would the earth warm up by 2050 if every company were to operate as emissions-intensively as yours does today? It’s a fascinating way to measure whether you are doing enough, or whether you are leaving the hard work to someone else. The fintech “right. based on science” has created a model that tries to answer these questions. They have used it on the 30 companies listed on the German DAX index by calculating the future emissions of each in different scenarios. As DAX members they can be considered corporate leaders setting an example for others in their sector. Their article, by Nicolas Schuerhoff and Lennart Schweser, focuses particularly on the two big German energy firms, RWE and E.ON. What happens with “business-as-usual”, compared to their self-declared targets? The results are not good. Indeed, for two-thirds of the 30 it’s not enough to meet the below 2°C Paris target, sometimes drastically so. The authors warn that these companies need to do more, noting that some have no climate strategy at all.
Just in time for the 25th annual Climate Conference in Madrid, new reports about the current state of our climate surfaced and the news is not good. Global greenhouse gas emissions have increased by 1.5% each year over the last decade and there is no sign of emissions peaking in the next few years. This means that deeper and faster cuts in emissions are needed by 2030 to reach the Paris Climate Targets. Meanwhile climate scientists warn that the threat of reaching global tipping points in the Earth’s ecosystem has increased. Exceeding those tipping points could start self-reinforcing processes that would have effects on the climate we do not fully understand yet and are not able to control.
This calls for meaningful action.
Corporate responsibility. Is it just PR?
For a long time, corporate responsibility and climate change mitigation has been an important communication and PR topic. Luckily, the adaptation to climate change and the reduction of climate-damaging greenhouse gas emissions is now increasingly being perceived as a strategically important issue. New climate initiatives, such as emission reduction targets and climate strategies are announced almost daily.
We observe that businesses recognise their responsibility to develop solutions that drastically reduce CO2 and other greenhouse gas emissions over the next 10 to 30 years. But if we take the Paris Climate Accord seriously, the effectiveness of these strategies is of primary importance.
So how effective are those climate strategies that have been developed recently? Will they help companies reduce their carbon footprint fast enough to be in line with the goal of keeping global warming well below 2°C? Using an economic climate impact model, we subjected the climate targets of the 30 biggest and most liquid German companies to an analysis.
Modelling the baseline v “scenario” emissions
With the X-Degree Compatibility (XDC) Model, our team from right. based on science has developed a method which allows us to measure a company’s contribution to climate change under different scenarios. Based on economic indicators and corporate emissions data, the model calculates by how much °C the earth would warm up by 2050 if every company were to operate as emissions-intensively as they do today
the one at hand. Using different scenarios, it is possible to compare a business-as-usual situation without climate targets (Baseline XDC) with a scenario in which the company reaches its self-imposed emission reduction targets (Scenario-based XDC).
In order to reach the <2°C target it is a prerequisite that companies decouple their economic growth from the emission of greenhouse gases. Unfortunately, however, many target ambitions are lacking. 2 out of 3 analysed company targets are not ambitious enough and some companies have no climate strategy at all.
Major energy suppliers matter the most
Major energy suppliers have a special responsibility in this respect. They play a system-critical role in our societies, ensuring prosperity and the necessary supply of electricity and heat. At the same time, however, when using conventional methods, the generation of this energy is a major burden on the environment. Solving this conflict requires dedication, an ambitious strategy and innovative technologies.
RWE and E.ON
Among the analysed companies, RWE and E.ON have a special importance to the German energy sector and play a crucial role regarding climate change mitigation. Recently the two companies have announced a deal which makes RWE one of the largest providers of green energy. In turn, E.ON became Germany’s largest energy company dealing with customer solutions and energy grids by acquiring large parts of RWE’s former subsidiary Innogy. But what effect do these strategies have with respect to minimising the companies’ contributions to climate change?
E.ON and RWE have set their own climate targets. While both want to become climate neutral in certain parts of their business, a closer look is needed. This has been done when modelling their business and climate performance in order to calculate their XDCs. We are thankful that RWE and E.ON actively cooperated with right. based on science to ensure a plausible quantification of their current climate targets. Since there are uncertainties regarding the deal, we used plausible assumptions which were discussed with the companies and are made transparent in the report.
RWE’s recently published climate target aims to reduce Scope 1 (direct) emissions to net-zero until 2040. Interim targets constitute a reduction in Scope 1 emissions of 33% by 2020 and 70% by 2030. Since there are no targets published for Scope 2 and 3 (indirect), these are modelled with baseline growth assumptions for emissions in the Shared Socioeconomic Pathway (SSP) 2 Marker Scenario.
Modelling the future emission reduction paths accordingly results in a Scenario-based XDC of 9.5°C while the Baseline XDC is 13.8°C.
E.ON has set itself an absolute target to have Scope 1, 2 and 3 emissions reductions of 30% by 2030, as well as aiming to reduce Scope 3 category 3 emissions by 50% until 2030 [Do you mean: reduce Scope 3 emissions by 50% until 2050]. As of 2031, a further absolute target applies for Scope 1 and 2 emissions, which should be reduced to zero by 2050. Since there are no targets announced for Innogy’s emissions, these are also modelled with baseline growth assumptions for emissions in SSP2 Marker Scenario.
When applying E.ON’s targets, the Scenario-based XDC is 8.1°C compared to a Baseline XDC of 8.3°C. The additional emissions caused by the purchase of Innogy, which are not subject to a reduction target and therefore modelled with baseline assumptions, have an important impact.
Both RWE and E.ON perform below the sector average
No doubt, the production of electricity is still an emission-intensive business, which is why the results must be interpreted carefully. Therefore, the energy sector’s (NACE code 35) XDC of 7.9°C and its Target XDC of 5.2°C provide valid benchmarks. The Target XDC defines the required contribution of a specific sector to limiting global warming to 1.75°C. This target value is derived from the sector-specific emissions budget as defined in the Beyond 2 Degree Scenario of the International Energy Agency (IEA B2DS). Given that, E.ON’s climate targets have a relatively low impact on its climate performance, while RWE’s climate strategy has a significantly higher impact on the XDC. Still, both perform worse than the sector average and the climate targets are not sufficient in order to reach the sector’s Target XDC and contribute to the Paris Climate Accord.
Most other major corporates fall short
With these results, RWE and E.ON are symbolic of the overall picture presented by other companies that we have analysed. While coming up with solutions that help to reduce their climate impact, most companies fall short of the target ambitions defined for their sectors. For true climate leadership, more ambitious plans are needed.
Lennart Schweser focuses on the macroeconomic side of right. based on science’s XDC Model. He studies Economics at Frankfurt’s Goethe University and Environmental Economics at the School of Business, Economics and Law in Gothenburg
- UNEP, Emissions Gap Report 2019: https://wedocs.unep.org/bitstream/handle/20.500.11822/30798/EGR19ESEN.pdf?sequence=13 ↑
- Nature, Climate tipping points – too risky to bet against: https://www.nature.com/articles/d41586-019-03595-0 ↑
- Energy Post, Shaking up the German energy market: the Eon and RWE deal: https://energypost.eu/shaking-up-the-german-energy-market-the-eon-and-rwe-deal/ ↑
- RWE, press release: https://www.group.rwe/en/press/rwe-ag/2019-09-30-the-new-rwe ↑
- The IPCCs 6th Assessment Report (AR6) will introduce Shared Socioeconomic Pathways (SSP) complementary to the Representative Concentration Pathways (RCP). See: K. Riahi et al., The Shared Socioeconomic Pathways and their energy, land use, and greenhouse gas emissions implications: An overview., Global Environmental Change 42, 2017, page 153–168. ↑
- E.ON SE: CDP report climate change 2019 ↑
- IEA ETP 2017 ↑